FAQs

Most employers had already closed their April payrolls using the old PAYE rates by the time the new tax relief measures came into effect. What is the effective date of the new rates and what is the way forward for such employers?

PAYE is a monthly tax which is accounted for on a calendar month basis. Due date for April taxes is 9th May. Since, the new rates of PAYE tax came into force before end of the calendar month, the applicable rates for April Payroll is the new rate and not the old.

In respect of employers who had closed their payroll and had applied old PAYE rates, they can either:

revise their payrolls to take into account the new rates and refund taxes over deducted to staff as they have not remitted deducted PAYE to KRA or

recover the over deducted PAYE in the month of May payroll (PAYE payable to KRA) to refund their staff.

What are the new PAYE tax brackets?

The new rates are:

PAYE Tax Bands                                                                         Rate of Tax

On the First     Ksh 24,000 (288,000 p.a)                                           10%

On the next     Ksh 16,667 (200,000 p.a)                                           15%

On the next     Ksh 16,666 (200,000 p.a)                                           20%

On all income amounts in excess of Ksh 57,334 (688,000 p.a)              25%

Monthly personal Relief Ksh 2,400 (28,800 annually)

 

On pensions the new tax rates are:

Pension Tax Bands                                                                 Annual Tax Rates

Any amount in excess of tax free amounts:

On first Ksh 400,000                                                                          10%

On next Ksh 400,000                                                                          15%

On next Ksh 400,000                                                                          20%

On any amount in excess of Ksh 1,200,000                                           25%

Will the implementation of the new PAYE tax rates affect my 2020 annual returns next year?

Yes, it would affect. There will be two new rates applicable. First, the old individual rates of taxes applicable for income earned from January to 31st March 2020 and secondly, the new rates which apply on incomes earned from April to December, 2020. Similarly, reliefs follow the same understanding. 

VAT reduction was effective 1st April 2020. How is this possible yet Parliament passed the amendments on 22nd April 2020?

The cabinet Secretary (CS) for National Treasury is by law given the powers to vary the VAT rate either upwards or downwards by rate not exceeding 25%. The variation becomes effective immediately on a date specified in the Kenya Gazzette. In this case, effective date was published as 1st April, 2020. Further, the CS upon publication, is required to lay the notice before the National Assembly (NA), within 21 days for consideration. The CS did lay the notice on the 14th of April, 2020 before NA as required, which was debated and approved.

 

The change in VAT rate did not require presidential assent as other tax laws amendments.

Will we revert to the old PAYE tax rates immediately the pandemic is over?

No, the new individual tax rates and any other tax amendments effected would last post COVID-19 pandemic.

Which exemptions have been removed from the Income Tax Act?

The exemptions deleted from the Income Tax Act were as follows under the 1st Schedule to the said Act:

Paragraph 4

The income of all the institutions listed in paragraph 4 which the Tea Board of Kenya, Pyrethrum Board of Kenya, Sisal Board of Kenya, Kenya Dairy Board, among others.

Paragraph 7

Profits or gains of the Agricultural Society of Kenya

Paragraph 9

Interest on any tax reserve certificates which may be issued by authority of the Government

Paragraph 18

Any payment in respect of disturbance made to  was employees in the public service of any of those governments or of the Community

Paragraph 25

The emoluments of any officer of the Desert Locust Survey who is not resident in Kenya.

Paragraph 28

Any education grant paid by the Government of the United Kingdom under any agreement between that Government and the Government of Kenya.

Paragraph 29

The income received by way of remuneration under any contract which was entered into consequent upon financial assistance being received from the International Co-operation Administration

Paragraph 30

The income received by virtue of their employment by citizens of the United States of America who are employed by the Department of Agriculture of the United States of America on research work in co-operation with Government.

Paragraph 31

Gains or profits resultant from any reward paid by the United Kingdom Atomic Energy Authority for the discovery of uranium ore in Kenya

Paragraph 32

All income of any non-resident person not having a permanent establishment in Kenya and which consists of interest or management and professional fees paid by the Tana River Development Company Limited or its successors in title

Paragraph 33

Such part of the income of the East African Power and Lighting Company

Paragraph 34

The income of the General Superintendence Company Limited

Paragraph 36

Exemption of CGT on gains made by an individual from : - shares in the stock or funds of the Government, the High Commission or the Authority established under the Organization or the Community; shares of a local authority; and land which has been adjudicated under the Land Consolidation Act or the Land Adjudication Act when the title to that land has been registered under the Registered Land Act and transferred for the first time.

Paragraph 40

Interest earned on contributions paid into the Deposit Protection Fund

Paragraph 41

Interest paid on loans granted by the Local Government Loans Authority

Paragraph 46

Dividends received by a registered venture capital company, special economic zone enterprises, developers and operators licensed under the Special Economic zones Act

Paragraph 47

Gains arising from trade in shares of a venture company earned by a registered venture capital company

Paragraph 52

Interest income generated from cash flows passed to the investor in the form of asset-backed securities.

Paragraph 55

Dividends paid by Special Economic Zone Enterprise, developers or operators to any non-resident person

Paragraph 56

Compensating tax accruing to a power producer under a power purchase agreement.

The whole of Part II (securities, the interest on which is exempt from tax) of the First Schedule.

What is the implication of increasing the monthly tax relief from Ksh 1,408 to Ksh. 2,400 on employment income?

Tax relief as the name suggests is a reduction or refund of tax from what is supposed to be payable as computed from the income earned. This means that the higher the tax relief, the lesser the tax payable. With the current increase of relief from Ksh 1,408 to Ksh 2,400, it means that a taxpayer has been given back by the government tax of Ksh 992 from what he/she ought to have paid. Relief therefore, lightens the tax burden on the taxpayer. It is a form of tax saving.

What is qualifying interest and how does the recent amendment to the income tax affect qualifying interest?

Qualifying interest is interest on income receivable by resident individuals from banks, buildings, societies or Central Bank of Kenya which are subjected to withholding tax (WHT) at source which is a final tax. This means prior to the new amendments, interest arising from other sources different from the above mentioned were not categorized as qualifying and hence, WHT thereon was not final.

With the new amendments, interest from whatever source receivable by resident individuals are now qualifying. Consequently, WHT charged is final.

The amendments are aimed at encouraging individuals to save in other institutions other than banks, building societies or CBK.  

When turnover tax was reintroduced early this year, qualifying businesses had to have an annual turnover not exceeding five million shillings. Under the new amendment to Turnover Tax provisions, the new threshold is annual turnover of between one million

Turnover tax (TOT) threshold currently applies to turnover of between Ksh one million and Ksh fifty million but not Ksh 5 million and 50 million as alluded.

There is no contradiction since the TOT & VAT are two different taxes with different threshold requirements.

A TOT taxpayer with a turnover exceeding five million shillings is required to register to charge and account for VAT. This is because, with the new income tax changes in law did not affect VAT registration threshold. Hence, there is no contradiction in the two laws.

Under the new turnover tax provisions, the incorporated entities whose annual turnover falls within the new threshold now qualify to pay turnover tax. How will such entities account for the corporate tax?

TOT is a tax payable at moment by both resident incorporated persons as well as individuals. TOT is income tax. Hence, once a person registers to fall under this tax head, he shall not be required again to pay individual income tax or corporate tax. TOT shall therefore, be the only income tax he shall be required to pay.

Will business qualifying for Turnover tax still qualify for presumptive tax?

Presumptive tax law has been repealed. Hence, it is no longer payable by any person within the TOT threshold.  In other words, it is no longer in our statutes as a tax payable.

When was the Value Added Tax reduction from 16 per cent to 14 per cent effective?

The new VAT rate of 14% became effective on the 1st of April, 2020.

My electronic tax register (ETR) is yet to be configured to reflect the new VAT rate. How do I go about this reconfiguration?

You are required to visit your ETR supplier to reconfigure immediately. It is illegal to charge VAT at 16% on your supplies from 1st of April, 2020

How do tax assessments arise? How does the Legal team get involved in the process?

The Kenyan tax system is a self-assessment system where a taxpayer assesses himself or herself and makes payments to KRA.

However, some individuals or business entities abuse the trust bestowed on them by the law to under declare or not to declare their income hence evading payment of taxes.

Before KRA makes a demand for taxes or issues an assessment, there is an elaborate engagement whereby documents, records and other information is requested for from the taxpayer for purposes of verifying the self-assessment. Where gaps are identified, leading to tax liability, the taxpayer is informed both orally and in writing and is requested to respond to the issues before an assessment or demand is issued.  Thereafter the taxpayer is informed of his or her right to object to the demand or assessment.

The taxpayer has the option of paying the taxes or objecting to the demand or assessment and appealing to the Tax Appeals Tribunal.

From a legal point of view, do taxation laws deprive citizens the burden of proof to successfully challenge income tax assessments?

The Kenyan tax system is a self-assessment system where a taxpayer assesses himself or herself and makes payments to KRA.  When a dispute arises, the taxpayer has the burden to support how he computed the self-assessed taxes.

That burden can only shift where KRA has issued additional tax assessments. KRA must state the sources, the law and the reason for the additional assessments.

What is the approximate time taken to conclude a tax case from assessment, dispute resolution to recovery of the taxes?

It takes a minimum of two (2) years to conclude a case at the Tax Appeals Tribunal, the High Court and Court of Appeal. Tax recovery takes a maximum of six (6) Months from the time it is initiated. However, some cases may take a shorter period to conclude depending on the availability of the parties and readiness of the Tribunal or Court. There are situations where parties opt for ADR and this takes three (3) Months or 90 days. The timelines for concluding ADR is dictated by the law.

What are some of the high impact cases handled by Legal that resulted to revenue collection especially in the FY 2018/19 and 2019/20?

Among the cases that have been resolved and taxes agreed involve a cargo holding logistic company, an excisable goods manufacturing company, a customs freight station, two county governments and a wind farm company whereby billions have been recovered.

Does the Alternative Dispute Resolution (ADR) unit handle some of these cases that are already in court? Is it the defendant or the complainant who initiates ADR, in such a case?

Yes. KRA or the taxpayer can apply for ADR.  The purpose of ADR is enable the parties to engage and arrive at an amicable solution to the tax dispute. It’s a win –win situation.

In case a taxpayer declares bankruptcy following a complete court case against her/him by KRA, what is the way forward?

Bankruptcy proceedings are filed in the High Court and there is an elaborate process involved. The person seeking to be declared bankrupt must inform its creditors of the bankruptcy proceedings. The legal team would ensure that the KRA is listed as a creditor during the bankruptcy proceedings and further ensure that the tax owed is listed in priority to other creditors.

We have not had cases where a taxpayer moves to be declared bankrupt following a court case. However we have had instances of company’s being dissolved and for that we have the Insolvency Act to guide us. 

What strategies has KRA instituted to ensure that cases are well handled in the Tax Appeals Tribunal and the court leading to revenue collection?

We have a number of strategies:

  1. The lawyers work hand in hand with the tax auditors who raise assessments to ensure that they are aligned on the issues being addressed. In KRA cases we have witnesses who are tax experts testifying in the cases and this ensures that technical questions are given first hand answers to the Tribunal or judge.
  2. All cases are evaluated by a Technical Evaluation Committee that ensures the KRA case is airtight if the case is to be litigated. If the case is weak the committee recommends settlement of the case by KRA. This ensures we only litigate strong cases that are likely to result in revenue collection.
  3. Within the litigation division, cases are handled by teams of lawyers as opposed by an individual counsel. This ensures objectivity, creativity, and support in the litigation process.
  4. KRA lawyers go on trainings from time to time to build capacity as both technical tax lawyers and in trial advocacy.
  5. KRA is a member of the Court users Committee which is a forum bringing together litigants to deliberate on the best ways to fast track the hearing and determination of cases.