A Review of Statutory Changes Introduced by the Finance Act of 2016
In September 2016, the President of Kenya signed into law the Finance Act for the year 2016. Enacted annually, the Finance Act is the headline fiscal legislation by the Kenyan Parliament, containing multiple provisions as to taxation and other aspects of commercial and financial law.
The Finance Act 2016 (hereinafter ‘the Act’) is meant to, among other things, implement some of the proposals made by the Cabinet Secretary for the National Treasury in his budget statement of 8th June 2016. The following is a highlight of the main amendments to the Income Tax Act, the Excise Duty Act 2015, Value Added Tax 2013, the Tax Procedures Act 2015 and several other statutes.
Companies Act, 2015
Section 82 of the Act amends section 975 of the Companies Act 2015 thus:
‘Section 975 of the Companies Act is amended in subsection (2) by deleting paragraph (b).’
The impact of this is that section 975(2) (b) of the Companies Act 2015, which required that for a foreign company to be registered, at least 30% of the shareholding should be held by a Kenyan citizen by birth, has now been scrapped.
The Income Tax Act (ITA)
Previously, personal relief was Kshs 13,944 pa (Kshs 1,162 pm). Section 17 of the Act has amended Head A (Item 1) of the Third Schedule to ITA hence increasing the personal relief to Kshs 15,360 pa (Kshs 1,280 pm).
The Act has also amended Head B (Item 1 and Item 1(A)) of the Third Schedule to ITA to expand the tax brackets. The new tax brackets are as follows:
Tax bracket Rate in each shilling
On the first Shs.134, 164 10%
On the next Shs.126, 403 15%
On the next Shs.126, 403 20%
On the next Shs.126, 403 25%
On all income over Shs.513, 373 30%
Income from employment paid in the form of bonuses, overtime and retirement benefits is exempted from tax. However, this exemption only applies to employees whose taxable employment income before bonus and overtime allowances does not exceed the lowest tax band, that is, Kshs. 134, 164 pa.
Besides, corporation tax rate has been reduced from 30% to 15% on every company that constructs at least 400 housing units per year. This is, however, subject to approval by the Cabinet Secretary responsible for housing.
Section 6 of the Act has amended section 15 of the ITA to make expenses incurred in sponsoring sports activities by both individuals and corporates tax deductible. However, such deduction requires prior approval by the sports Cabinet Secretary.
Section 8 of the Act amends section 34(2) by deleting paragraph I of the ITA which abolishes tax charged on lottery winnings that was payable by lottery winners.
Finally, transfer of assets between spouses, former spouses as part of a divorce settlement or a bona fide separation agreement, to immediate family, to immediate family as part of a divorce or bona fide separation agreement or to a company where spouses or a spouse and immediate family hold 100% shareholding is exempted from capital gains tax.
Value Added Tax Act No. 35 of 2013
The following items are now exempted from VAT:
- Any service charge paid in lieu of tips.
- Goods and services imported or purchased locally for use by the local film producers and local filming agents upon recommendation by the Kenya Film Commission subject to approval by the Cabinet Secretary to the National Treasury.
- Goods for use in the assembly manufacture or repair of clean cooking stoves approved by the Cabinet Secretary upon recommendation by the Cabinet Secretary for the time being responsible for matters relating to energy.
- Items used in the manufacture of sanitary towels.
- Taxable goods for the direct and exclusive use for construction of specialized hospitals with accommodation facilities upon the recommendation by the Cabinet Secretary responsible for health; and
- Entry fees into the national parks and national reserves, services of tour operators, excluding in-house supplies.
Further, fuel VAT exemption has been extended by a further 2 years from 1st September 2016 and liquefied petroleum gas has been moved from the exempted items list to zero rated items.
Tax Procedures Act (TPA)
The TPA has been amended to include a requirement that where a non-resident person with no fixed place of business in Kenya is required to register under a tax law, the non- resident person shall appoint a tax representative in Kenya in writing. This means that foreigners will not be able to obtain tax PIN certificates without making such an appointment.
The Act further requires that overpaid tax is to be refunded within a period of two years from the date of application, failure to which the amount due shall attract an interest of 1% per month or part thereof of such unpaid amount after the period of two years.
Besides, any tax refunded to a tax payer in error shall attract an interest of 1% if payment is not made within 30 days of the date of service demand by the commissioner. Interest chargeable shall however not exceed 100% of the taxes originally due.
Betting, Lotteries and Gaming Act
This act has been amended to introduce the following three taxes:
- Betting Tax
Section 80 of the Act has amended section 29 to introduce a betting tax chargeable at the rate of 7.5% out of the gaming revenue. Gaming revenue here means gross turnover less the amount paid out to customers as winnings.
- Gaming Tax
This is chargeable at the rate of 12% of the gaming revenue. The tax shall be paid to the Collector by a person carrying on a gaming business on the 20th day of the month following the month of collection.
- Lottery Tax
Section 82 the Act has amended section 44 to introduce this tax chargeable at the rate of 5% of the lottery turn over. The tax is to be paid to the Collector by a person authorized to promote the lottery on the 20th day of the month following the month of collection.
- Prize Competition Tax
Chargeable on the cost of entry to a competition which is premium rated at the rate of 15% of the total gross turnover. The tax is to be paid to the Collector on the 20th day of the month following the month of collection
Tax Appeals Tribunal Act
Section 64 of the 2016 Act amends the Tax Appeals Tribunal Act to allow advocates to represent appellants before the Tax Appeals Tribunal.
The Retirement Benefits Act
Section 49 of the Act has amended section 29 of the Retirement Benefits Act to allow for issuance of perpetual licences. The section now reads as follows:
‘A certificate of registration issued to a manager, custodian or administrator shall be valid from the date of issue and shall, unless suspended or revoked, remain valid. An annual fee should be paid to the authority as prescribed. Current audited financial statements, a list of the directors and top management, any changes in clientele and such further information as the Authority may request should be submitted to the Authority by the 30th September of every year.’
The Capital Markets Act Cap
Section 49 of the Act has amended section 12 to this Act, to add into the authority the power to carry the operations and supervision of online forex trading activities and online forex brokers. By dint of amendments to section 2, “online forex broker” means a body corporate duly licensed by the Authority to engage in the business of online trading in foreign exchange as an agent of investors in return for a commission and on its own account.
The Banking Act
Section 31(3) (b) of the Banking Act has been amended to include among institutions that are affected by credit information sharing regulations Sacco Societies, Co-operative Societies, Public Utility Companies and any other institution mandated to share credit information under any written law.
Consumer Protection Act
Section 62 of this act has been amended at clause 5 to exempt its application to a credit agreement where the lender is either a bilateral or multilateral foreign financial institutions