Razan Al-Mahdi
Accountant at 3A CPA LLP
The Finance Act 2023, a key law to shape Kenya’s financial landscape, has sparked much debate. To cancel it would have huge tax implications touching many parts of the economy, businesses and individuals alike. This article explores what might happen if this occurs looking at the tax implications specifically.
The Finance Act 2023 was effective 1st July 2023, its contents were structured to raise more funds for Government expenditure in an attempt to curtail the country’s foreign debt reliance, these expenditures include infrastructure projects, social services, and public sector salaries. To nullify this Act would therefore cause an instant drop in expected Government revenue leaving the Government with two options, either to implement Austerity measures and or increase the country’s debt levels further.
Focusing however on the Tax implications, the following taxes are the main ones which will directly be affected by such an action:
Pay As You Earn (PAYE): The income brackets for PAYE were increased in the Finance Act 2023 for the two highest tax brackets from 30% to 32.5% and 35%.
Turnover Tax (TOT): The Finance Act 2023 lowered the upper threshold for turnover tax from KShs 50 million to KShs 25 million and the tax rate increased to 3% from the previous 1%.
Digital Assets Tax: The Finance Act 2023 introduced this tax on the transfer and exchange of digital assets such as crypto currency transactions.
Electronic Tax Invoicing Management System (e-TIMS): The Finance Act 2023 has given taxpayers an obligation to ensure all deductible expenditures must use invoices generated by (e-TIMS) in order for them to actually be deductible. A non-compliance administrative penalty has also been imposed.
Withholding Tax (WHT): The Finance Act 2023 introduced WHT on sales promotion, marketing and advertising services at a rate of 5% for residents. WHT was also introduced on digital content monetisation at a rate of 5% for residents and 20% for non-residents. Also, if rental tax was received on behalf of the owner (e.g. by a property manager), they were to deduct WHT from it if they were appointed to do so by the Commissioner.
Another aspect of WHT which made compliance challenging was that WHT was to be paid within 5 days of the day it was deducted otherwise, penalties and interest were imposed.
Monthly Rental Income (MRI): The rate was reduced from 10% to 7.5%.
Value Added Tax (VAT): VAT on petroleum products were increased from 8% to 16%, removal of VAT on Liquefied Petroleum Gas (LPG), all suppliers of imported digital services had to be registered for VAT regardless of whether these supplies met the annual threshold of KSh 5 million or not.
Several exemptions were introduced for VAT as well as Zero rated supplies such as that for LPG.
An increase in Excise Duty on various imports; all by at least 10% and a decrease of Excise Duty for items like data services and money transfers by at least 5%. Similarly, Excise Duty was imposed on a lot of imported goods in order to support local production for items such as cartons, boxes etc. with rates at 25%.
Notably, the Finance Act 2023 has introduced a Tax Amnesty program to encourage taxpayers to pay off overdue Principal Tax amounts so that a waiver can be applied on the related penalties and interest imposed.
It has also increased the period for settlement of disputes of out of Court or Tribunal from 90 to 120 days.
Looking at the above taxes which affect the majority of taxpayers, a nullification of the Finance Act 2023 will have a direct tax relief on many, however, there are some benefits to the taxpayer from The Finance Act 2023, most notably, that of The Tax Amnesty program which was so successful that it had to be kept and indeed extended as The Tax Procedures Amendment Bill 2024 included an amendment of Section 37E subsection (3) (b) which replaced the expression 30th June 2024 with the expression 30th June 2025.
Despite the fact that a lot of the effects of the nullification may favour the taxpayer, however, the detrimental effect may be in the long-term as businesses in Kenya would face uncertainty going forward and potential disruption due to further sudden changes in the tax landscape. It may start to become very challenging for a business to have long-term plans based on the fact that there is instability in the tax expenditure that they will incur.
Nullifying the Act could lead to a reversion to the Finance Act 2022, causing confusion and necessitating costly adjustments in accounting and compliance systems. Moreover, businesses that had already adapted to the new tax measures would need to undo these changes, incurring additional administrative and operational expenses. Such as the case with e-TIMS for example.
Accountants will especially suffer as taxpayers need clear guidance on which tax provisions are in force, potentially leading to disputes and litigation. The administrative burden on the Kenya Revenue Authority (KRA) would also increase, as they would need to adjust enforcement and collection strategies to align with the nullified Act.
All in all, there is still no clarity on the practicality aspect of the nullification of the Finance Act 2023 and despite potential tax relief attained by the taxpayer in the short run, it is not clear how long it will last, the uncertainty of the whole process causes confusion and reduces confidence in the stability of the economy in Kenya as a whole.
By ACCA Razan Al-Mahdi
