BRIEF HIGHLIGHTS OF FINANCE BILL 2025. THE GOOD | THE BAD | THE UGLY

The GOOD

• Full exemption of retirement gratuity: the lump sum paid to a person upon retirement is no longer liable to any income tax, a much welcomed relief.
• Per diem allowance: The increase of the non-taxable cash benefit limit from KES 2,000 to KES 10,000 eases the burden of higher cost of transportation.
• Significant Economic Presence (SEP) Tax: Has been clarified making it less ambiguous than the previous Digital Service Tax with the rate slashed by 50% from 3% to 1.5%.
• Full write off: Applicable to tools, utensils and similar equipment in the same year they are bought rather than depreciating over multiple years improving cash flow for small business owners and offering opportunities for earlier re-investment.
• Increase of VAT threshold registration: From KES 5 million to KES 8 million, leaving many small businesses no longer needing to register for VAT.
• eTIMS: No longer required by farmers and businesses with turnover below KES 1 million.
• Pension Contributions: The exemption limit will increase from KES 20,000 per month to KES 30,000 increasing retirement savings and decreasing taxable pay.
• Withholding Tax on dividends and interest to be made a final tax: Once withholding tax has been deducted at source, the taxpayer is no longer required to declare it in income tax returns.
• Expenditure incurred on construction of owner-occupied residential premises: Up to KES 360,000 per annum to be an allowable previously this was only open to loans used to
  purchase homes.

THE BAD

• VAT rates: The VAT Act will experience significant shifts touching on many items moving from zero-rated supplies to exempt status impacting aviation, health, tourism, transport, agriculture and energy. Others will also be moving from exempt status to the standard rate. This is an indirect tax that will further increase the cost of living.
• Capped years for carrying losses forward: Affecting the Income Tax Act, companies will no longer be able to carry losses forward indefinite- ly, a limit of 5 years is set which will discourage long-term projects, especially business which take years to break-even.
• Excise Duty Act: Excise Duty & Environmental Levies Expansion to include a broader range of items such as plastic packaging, batteries, diapers, tyres, phones, solar devices (Eco-Levy) and vegetable oils. This is yet another indirect tax that will directly have an impact on higher cost of living.
• Expanded Tax Invoice definition: To be amended on the VAT Act by removing the word ‘’taxable’’ in order to align with The Tax Proce- dures Act which already requires e-TIMS for tax invoicing. This would make the use of e-TIMS mandatory for all goods and services, be it taxable, zero-rated or exempt. All businesses will have to be on e-TIMS and not just VAT registered ones.
• VAT Act to reduce refund claims: Shorter refund claim timelines for VAT from 24 to 12 months. The removal of the ability to offset excess withholding VAT or input VAT against other tax liabilities such as PAYE or Income Tax. The tax payer must wait for the refund. Bad-debt refund period to be cut from 3 to 2 years, introducing a new option to offset approved bad-debt refunds against future VAT liabilities ONLY, subject to Commissioner approval.

The UGLY

• Removal of tax incentives outside Nairobi, Mombasa or Special Economic Zones (SEZs): Companies investing in buildings, machinery or equipment outside these areas no longer enjoy any tax incentives, significantly discouraging regional investment whilst worsening economic imbalance at the same time.

Here’s what the Committee didn’t pass

• KRA gaining power to request personal data and trade secrets information for integration of electronic tax systems
• Removal of tax incentives for Real Estate developers constructing 100 units or more annually from 15% to 30%
• Removal of tax incentives for local vehicle assemblers from 15% to 30%
• Removal of Excise Duty on Extra Neutral Alcohol (ENA)
• Modification of the SEP Threshold
• Expansion of Agency Notice to include non-residents as well as granting KRA power to obtain amounts from third parties whom owe the taxpayer in question money.