The Tax Laws Amendment Bill, 2024, was officially signed into law on December 11, 2024, with an effective date of December 27, 2024. This legislation introduces a broad range of reforms designed to enhance tax compliance, streamline tax administration, and address evolving economic needs. The amendments aim to modernize the tax system, introduce new taxes, clarify existing provisions, and provide relief to taxpayers. Below is a discussion of the key highlights of some of these changes

Amendments to the Income Tax Act

  1. Expansion of Royalty Definition: Section two now expands the definition of “royalty” to include payments for any software, whether proprietary or off-the-shelf, covering licenses, development, training, maintenance, and support fees. This change aims to clarify which royalty payments are subject to withholding tax, ensuring better compliance in the software and digital services sectors.
  2. Digital Marketplace Expansion: Section 3 has been amended to broaden the definition of “digital marketplace” to encompass ride-hailing, food delivery, freelance, and professional services. This expansion will ensure that these services are subject to withholding tax, promoting fairness in taxation across both traditional and digital businesses.
  3. Employee Benefits Exemptions: The tax-free thresholds for certain employer-provided benefits have been increased, with meal benefits rising from KES 48,000 to KES 60,000, and non-cash benefits increasing from KES 36,000 to KES 60,000. This change aims to ease the financial burden on employees, improving their take-home pay and incentivizing employers to provide better benefits.
  4. Significant Economic Presence Tax: The introduction of a new tax, the Significant Economic Presence Tax (SEP), replaces the Digital Services Tax (DST). SEP applies to non-resident digital platforms with no permanent establishment in Kenya but significant economic activity. The tax rate is set at 30% of deemed taxable profits, ensuring that multinational digital businesses contribute fairly to the Kenyan economy.
  5. Minimum Top-Up Tax: A new Section 12G introduces a minimum top-up tax for companies with a consolidated annual turnover exceeding 750 million euros and an effective tax rate below 15% over two out of the last four years. This measure targets multinational enterprises, ensuring that they pay a minimum level of tax on their profits, preventing tax base erosion.
  6. Increased Allowable Deductions: Contributions to the Social Health Insurance Fund, Affordable Housing Fund, and post-retirement medical funds are now tax-deductible, up to KES 15,000 monthly. The mortgage relief has also been increased from KES 300,000 to KES 360,000 per year. These changes aim to reduce the tax burden on individuals and encourage savings for healthcare and housing.
  7. Pension and Provident Fund Contributions: Amendments to Sections 22A & B increase the annual deductible contributions to pensions from KES 240,000 to KES 360,000, and monthly contributions from KES 20,000 to KES 30,000. This measure seeks to encourage individuals to save more for their retirement by offering greater tax incentives.
  8. Affordable Housing Relief Repeal: The Affordable Housing Relief is repealed, and the provision is now included under Section 15 as a tax-deductible expense. This streamlining ensures that affordable housing incentives are more effectively integrated into the tax code.
  9. Insurance Relief Adjustment: The amendments to Section 31(1) replace references to the National Hospital Insurance Fund (NHIF) with the Social Health Insurance Fund (SHIF), allowing contributions to SHIF to qualify for insurance relief at 15%, capped at KES 5,000 per month. This change provides a more comprehensive approach to health insurance relief, benefiting taxpayers who contribute to the new fund.
  10. Payments Attracting Withholding Tax: The Act introduces withholding tax for new categories of payments, including:
  • Supplies to Public Entities: Non-residents will be taxed at 5%, while residents will be taxed at 0.5%.
  • Payments on Digital Platforms: Payments made via digital platforms will be subject to withholding tax at rates of 20% for non-residents and 5% for residents.
  • Sale of Scrap: The tax rate on scrap sales is set at 1.5% of the gross amount.
  1. Income exempt from tax: Paragraph 53 of the first schedule has been enhanced to exclude the following payments from tax:
  • Pension benefits from a registered pension fund, registered provident fund, registered individual retirement fund, public pension scheme or National Social Security Fund, upon attainment of the retirement age;
  • Gratuity or other allowances paid under a public pension; and
  • Withdrawals prior to attainment of  retirement age due to ill health or after the twenty years from the date of registration as a member of the fund
  1. Non-resident Contractors, Sub-contractors, Consultants, or Employees: Non-resident contractors, sub-contractors, consultants, or employees engaged in projects fully financed by grants are now exempt from tax, incentivizing foreign participation in grant-funded projects

Value Added Tax (VAT) Act Amendments

  1. Time of Supply: The time of supply for exported goods is now defined as the issuance of export certification by Customs. This ensures that only legitimate exporters can claim VAT refunds, protecting revenue.
  2. Input Tax Credit: The removal of the 90:10 apportionment formula aligns input VAT claims with the actual ratio of taxable to total supplies, promoting fairness and reducing abuse.
  3. Integration with EAC Customs Act: The Act extends the application of the East African Community Customs Management Act to include VAT on exported goods, ensuring consistency in regional trade practices.
  4. Reclassification of Goods and Services: The reclassification of various goods and services into taxable, exempt, or zero-rated categories aligns tax obligations with economic activities, ensuring appropriate tax treatment of specific sectors.

The following goods will now be taxable:

  • Direction-finding compasses, instruments and appliances for aircraft;
  • Any other aircraft spare parts imported by aircraft operators or persons engaged in the business of aircraft maintenance upon recommendation by the competent authority responsible for civil aviation;
  • Specially designed locally assembled motor vehicles for transportation of tourists
  • Betting, gaming and lotteries services;
  • Hiring, leasing and chartering of aircrafts, excluding helicopters of tariff numbers 8802.11.00 and 8802.12.00;
  • Air ticketing services supplied by travel agents;
  • Entry fees into the national parks and national reserves; and
  • The services of tour operators, excluding in-house supplies

The following goods will now be exempted

  • All imported inputs and raw materials supplied to manufacturers agricultural pest control products upon recommendation by the Cabinet Secretary for the time being responsible for agriculture; 
  • Fertilizers of Chapter 3; 
  • Inputs or raw materials locally purchased or imported by manufacturers of fertilizer as approved from time to time by the Cabinet Secretary responsible for Agriculture;
  • Goods of tariff number 4703.21.00 for use in the manufacture of baby diapers, sanitary towels (pads) and tampons; and
  • Transfer of a business as a going concern

Excise Duty Act Amendments

  1. Digital Service Providers: The Act extends excise duty to digital services provided by non-residents, ensuring that these services are taxed in a manner similar to traditional services.
  2. Support for Local Agriculture: Excise duty remission has been introduced for spirits made from locally sourced grains, excluding barley, supporting Kenya’s agricultural sector.
  3. Extension of Payment Period for Alcoholic Beverages: The excise duty payment period for alcoholic beverages has been extended from 24 hours to the fifth day of the following month. This adjustment is aimed at easing cash flow pressures for manufacturers.
  4. Excise Duty Rate Adjustments: Several excise duty rates have been adjusted, including on electric vehicles, cigarettes, nicotine products, and internet services. These changes reflect the government’s strategy to regulate consumption and encourage eco-friendly options.

        The duty of the following items have been adjusted:

  • Imported sugar excluding sugar imported by a registered manufacturer and raw sugar imported for processing by a kg licensed sugar refinery will now attract duty at 7.50 per kg;
  • Locally assembled electric vehicles will now attract excise duty at 20%;
  • Cigarette with filters (hinge lid and soft cap) will now attract duty at KES 4,100 per mille;
  • Cigarettes without filters (plain cigarettes) will now attract duty at KES 4,100 per mille;
  • Products containing nicotine or nicotine substitutes intended for inhalation without combustion or oral application but excluding medicinal products approved by the Cabinet Secretary responsible for matters relating to health and other manufactured tobacco and manufactured tobacco substitutes that have been homogenized and reconstituted tobacco, tobacco extracts and essences will attract duty at KES 2,000 per kg;
  • Liquid nicotine for electronic cigarette to attract excise duty at KES 100 per milliliter;
  • Imported Electric transformers and parts of tariff codes 8504.10.00,8504.21.00,8504.22.00,8504.23.00,8504.31.00 , 8504.32.00, 8504.34.00,8504.90.00 to attract duty at 25%;
  • Imported printing ink of tariff 3215.11.00 and 3215.19.00 but excluding those originating from East African Community Partner States that meet the East African Community Rules of Origin to attract duty at 15%; and
  • Imported Ceramic sinks, wash basins, wash basin of pedestals, baths, bidets, water closet pans, flushing custom s cisterns, urinals and similar sanitary fixtures of tariff heading 6910 to attract duty at the rate of 35% of Customs value or KES 100 per kg.
  • Telephone and internet data services shall be charged excise duty at a rate of 15% of their excisable value;
  • Excise duty on gaming shall be fifteen percent of the amount wagered or staked;
  • Excise duty on prize competition shall be fifteen percent;
  • Excise duty on lottery (excluding charitable lotteries) shall be fifteen percent of the amount paid or charged to buy the lottery ticket; and
  • Advertising over the internet and social media will now fall under the ambit of excise duty.

Here’s a summary of the amendments in the Tax Laws Amendment Act, 2024 that directly affect employees:

  1. Increased Tax-Free Thresholds for Benefits:
  • Meal Allowances: The tax-free limit has increased from KES 48,000 to KES 60,000 annually.
  • Non-Cash Benefits: The tax-free limit for employer-provided non-cash benefits has increased from KES 36,000 to KES 60,000 annually.
  • Impact: Employees enjoy higher take-home pay as more benefits are exempt from taxation.
  1. Enhanced Deductions for Retirement and Housing:
  • Pension Contributions: Annual deductible contributions to pensions increased from KES 240,000 to KES 360,000.
  • Monthly Pension Deductions: Raised from KES 20,000 to KES 30,000.
  • Mortgage Relief: Increased from KES 300,000 to KES 360,000 annually.
  • Impact: Encourages long-term savings for retirement and housing, while reducing taxable income.
  1. Insurance Relief Adjustments:
  • Contributions to the new Social Health Insurance Fund (SHIF) qualify for relief at 15%, capped at KES 5,000 per month.
  • Impact: Offers financial relief to employees contributing to health insurance.
  1. Affordable Housing Relief Repeal:
  • Previously provided as direct relief, it is now included as a tax-deductible expense under Section 15.
  • Impact: While streamlined, this may cause confusion among employees expecting direct benefits.