Decoding the Tax Laws Amendment Bill, 2024: What It Means for You

In an ambitious move to boost economic growth and address the fiscal deficit, the National Treasury has proposed the Tax Laws Amendment Bill, 2024. This Bill introduces sweeping changes aimed at modernizing Kenya’s tax framework, promoting equity, and enhancing revenue collection. From adjustments to digital marketplace taxation to increased allowances for employees, these amendments signal a significant shift in the nation’s fiscal policy. But how will these changes impact businesses and individuals? Let’s break it down.

Income Tax Act Amendments

The Tax Laws Amendment Bill, 2024 proposes several key changes to the Income Tax Act that will affect individuals, businesses, and multinational corporations. Here’s what you need to know:

1. Redefinition of Royalties:
   • The definition of “royalty” has been expanded to include payments for all types of software—whether licensed, proprietary, or off-the-shelf. This means withholding tax will now apply to software-related payments, covering development, training, maintenance, and support fees.
   • Implication: Kenyan businesses relying on imported software solutions might face higher costs, potentially affecting SMEs and startups.
2. Digital Marketplace Expansion:
   • The definition of a “digital marketplace” now includes ride-hailing, food delivery, freelancing, and professional services platforms. Income earned through these platforms will be taxed if the Bill passes.
   • Implication: Freelancers and platform-based workers may experience reduced take-home pay. However, this move aligns Kenya’s tax policies with global trends in digital taxation.
3. Employee Benefits Exemptions:
   • The tax-free thresholds for employer-provided benefits are set to increase:
     • Meal Benefits: From KES 48,000 to KES 60,000 annually.
     • Non-Cash Benefits: From KES 36,000 to KES 60,000 annually.
     • Gratuity Payments: From KES 240,000 to KES 360,000 annually.
   • Implication: Employees will enjoy higher disposable income, potentially improving quality of life and workplace satisfaction.
4. Introduction of Significant Economic Presence Tax (SEP):
   • The SEP tax will replace the Digital Services Tax (DST) and impose a 30% tax on deemed taxable profits for non-resident digital businesses without a permanent establishment in Kenya.
   • Implication: This ensures foreign digital giants contribute to Kenya’s revenue base, though it may affect the cost of digital services locally.
5. Minimum Top-Up Tax:
   • Multinational enterprises with consolidated turnover exceeding KES 100 billion and an effective tax rate below 15% will pay a “minimum top-up tax.”
   • Implication: Aligns Kenya with the global minimum tax framework, promoting fairness among large multinationals.
6. Increased Allowable Deductions:
   • Contributions to the Social Health Insurance Fund (SHIF), Affordable Housing, and post-retirement medical funds (up to KES 15,000 monthly) will now be tax-deductible.
   • Mortgage relief will increase from KES 300,000 to KES 360,000 annually.
   • Implication: These changes are a boon for employees, enhancing their disposable income and encouraging investment in housing and healthcare.
7. Pension and Provident Fund Contributions:
   • Deductible contributions to pensions will rise from KES 240,000 to KES 360,000 annually (KES 20,000 to KES 30,000 monthly).
   • Implication: Encourages long-term savings and financial security for retirees.
8. Repeal of Affordable Housing Relief:
   • Section 30A, which provided affordable housing relief, will be repealed. Relief will now be addressed under deductible contributions in Section 15.
   • Implication: Simplifies tax provisions while retaining the benefit for housing investments.
9. Insurance Relief Adjustment:
   • Contributions to SHIF will now qualify for insurance relief at 15%, capped at KES 5,000 per month.
   • Implication: This change aligns insurance relief with the transition from NHIF to SHIF, ensuring continuity in tax benefits.
10. Payments Attracting Withholding Tax:
    • Payments for supplies to public entities and digital platform transactions will attract withholding tax:
      • Public Supplies: 5% for non-residents and 0.5% for residents.
      • Digital Platforms: 20% for non-residents and 5% for residents.
    • Implication: Encourages compliance but may increase costs for public entities and digital platforms.
11. Tax-Exempt Income Expansion:
    • Tax-exempt categories will now include:
      • Pension benefits and gratuity allowances from public pensions upon retirement.
      • Withdrawals from registered pension funds due to ill health or after 20 years of membership.
    • Implication: Offers better financial security for retirees and individuals facing health challenges.
12. Tax on Interest Income from Infrastructure Bonds:
    • Interest income from listed infrastructure bonds issued after the Bill’s passage will now attract a 5% tax.
    • Implication: May affect investment attractiveness but aligns with efforts to widen the tax base.
13. Tax Exemptions for Non-Resident Contractors:
    • Non-resident contractors, subcontractors, and employees working on projects funded entirely by grants will be exempt from taxes.
    • Implication: Facilitates international development projects while maintaining tax fairness.
14. Changes for Export Processing Zones (EPZ):
    • Penalties for failing to submit returns will now be handled under the Tax Procedures Act.
    • Implication: Simplifies compliance and reduces administrative burdens for EPZ enterprises.

Value Added Tax (VAT) Amendments

The Tax Laws Amendment Bill, 2024, proposes significant updates to the VAT Act, aimed at streamlining tax administration and ensuring compliance. Below are the key changes:

1. Time of Supply:
   • The definition of the “time of supply” for exported goods will now be based on when a certificate of export (or equivalent document) is issued by Customs.
   • Implication: This ensures that only legitimate exporters benefit from VAT refunds, reducing fraudulent claims.
2. Input Tax Credit Changes:
   • The Bill repeals the 90:10 apportionment formula. Previously, taxpayers making at least 90% taxable supplies could claim 100% of input VAT. Under the new rule, input VAT claims will be proportional to taxable vs. total supplies.
   • Implication: Businesses with a mix of taxable and non-taxable supplies may experience reduced VAT recovery, impacting cash flow.
3. Integration with the East African Community (EAC) Customs Act:
   • Expands the application of the EAC Customs Management Act to include VAT on exported goods.
   • Implication: Promotes regional harmonization but might require businesses to adjust their compliance processes.
4. Reclassification of Goods and Services:
   • Certain goods and services are reclassified as taxable, exempt, or zero-rated. The proposed changes are summarized in the table below:

1. Miscellaneous Adjustments:
   • Taxpayers who supply inputs/raw materials for specific goods (e.g., fertilizers or pest control products) will benefit from VAT exemptions, subject to approval by the Cabinet Secretary for Agriculture.
   • Implication: Encourages local manufacturing and supports agriculture.

Excise Duty Act Amendments

The proposed amendments to the Excise Duty Act aim to expand the tax base, streamline compliance, and support local industries. Key changes include:

1. Taxation of Digital Service Providers:
   • Non-resident entities offering excisable services (e.g., streaming platforms, digital advertising) in Kenya will now be subject to excise duty.
   • Implication: Ensures parity between traditional service providers and digital platforms while potentially increasing costs for consumers.
2. Goods and Services Exempt from Excise Duty:
   • Spirits made from locally sourced grains (excluding barley) will now enjoy duty remission.
   • Implication: Supports the local agricultural sector and promotes cost competitiveness for domestic spirit manufacturers.
3. Extended Payment Period:
   • Excise duty payment for alcoholic beverages is extended from 24 hours to the 5th day of the following month.
   • Implication: Eases cash flow constraints for manufacturers.
4. Excise Duty Adjustments:
   • The Bill proposes revised excise duty rates for a variety of goods and services. These are summarized in the table below:

Excise Duty Adjustments Table

1. Miscellaneous Updates:
   • Excise duty on spirits made from local grains (excluding barley) will now be eligible for remission, promoting the use of locally available raw materials.
   • Imported sugar intended for manufacturers will be subject to the excise duty unless exempted.

Key Changes in the Miscellaneous Fees and Levies Act

1. Increase in Railway Development Levy (RDL):
   • The RDL will increase from 1.5% to 2.5% of the customs value of goods.
   • Implication: This will provide additional funding for infrastructure projects but may raise import costs for businesses.
2. Promotion of Local Manufacturing:
   • Inputs for specific industries, such as fertilizers and pest control products, will be exempted from certain levies, provided they are recommended by the respective Cabinet Secretary.
   • Implication: Encourages local production and reduces dependency on imports for critical agricultural products.
3. Export Promotion Levy Adjustments:
   • Some goods originating from East African Community (EAC) partner states and meeting the EAC Rules of Origin criteria may now qualify for reduced or exempted levies.
   • Implication: Aligns with regional trade agreements and reduces costs for intra-EAC trade.