The year 2020 has seen major amendments in the law. Most of the changes are aimed at cushioning taxpayers from the detrimental effects of Covid-19. The Finance Act 2020 was passed by the National Assembly on 23rd June 2020 and assented to by the President on 30th June 2020. This Act builds on changes brought about by the Tax Laws (Amendment) Act 2020 and also provides for other miscellaneous amendments.
A major highlight of the Finance Act 2020 is the introduction of new types of taxes, such as Minimum Tax. This is a base tax payable by all businesses at the rate of 1%, regardless of whether they make a profit or not. The tax is payable in installments and shall be due on the 20th day of each period ending on the 4th, 6th, 9th and 12th month of the year of income. Taxpayers are not required to pay Installment Tax if it is less than the minimum tax. However, installment tax is payable if it is higher than the minimum tax. The introduction of minimum tax aims at ensuring that all taxpayers pay taxes irrespective of their performance.
Digital Service Tax (DST) has also been introduced and is payable at the rate of 1.5% of the gross transaction value. The tax targets persons who derive income from provision of services through a digital marketplace. A digital marketplace is basically a platform that enables a direct interaction between buyers and sellers of goods and services through electronic means.
DST is due at the time of transfer of payment for the service by the service provider. Residents and non-residents with permanent establishments in Kenya are entitled to offset the digital service tax against their income tax payable for the particular year of income. For nonresidents, DST is a final tax. The Tax Procedures Act has further introduced appointment of DST agents by the Commissioner to facilitate the collection of the tax.
The Act has also introduced a Voluntary Disclosure Programme (VDP) to run for a period of 3 years starting 1st January 2021. Taxpayers are granted waiver of penalties and interest on tax arrears arising from previous instances of non-compliance and non-disclosures. The reference period is between 30th June 2015 and 1st July 2020. If the application is accepted, the taxpayer shall be granted a 100% remission of interest and penalties, if the disclosure is made and tax liability paid within the 1st year of the programme. Taxpayers who make disclosures and pay tax liabilities in the 2nd and 3rd year will be granted 50% and 25% remission respectively. The VDP is aimed at improving revenue collection through enhanced compliance.
Another amendment to the Income Tax Act is the increase of the upper threshold of residential rental income from Kshs 10 million to Kshs 15 million. The lower threshold has been increased from Kshs 144,000 to Kshs 288,000 per annum in order to align with the current lower individual tax band. This is a huge relief for landlords who are under pressure to help tenants cope with the effects of Covid-19 pandemic.
The Finance Act 2020 also introduced a repeal of tax exemptions applicable to certain incomes, such as Home Ownership Savings Plan (HOSP) and National Social Security Fund (NSSF). Previously, persons who deposited funds to a registered HOSP were entitled to a deduction of up to KShs. 48,000 per annum (4,000 per month). However, HOSP has not been widely implemented in Kenya.
The Act has also removed the exemption from tax on bonuses, overtime and retirement benefits paid to employees whose taxable employment income does not exceed the lowest tax band. The amendment can be attributed to the recent expansion of the minimum tax band from KShs. 12,986 to 24,000 per month in the Tax Laws Amendment Act, 2020.
These are some of the major amendments in the Income Tax Act and the Tax Procedures Act. According to the IMF, the country’s economy is expected to shrink and move into a recession due to the Covid-19 pandemic. We can only hope that the changes will live up to the government’s expectations.
Tax Education, KRA