Zachary Ochuodho @zachuodho

National Treasury has proposed to introduce drastic changes to the tax incentives and exemption regime, which if approved, are likely to water down the proposed tax reductions.

Key among the proposals floated for consideration include providing 100 per cent tax relief for individuals who earn gross monthly income of up to Sh24,000 and reduction of income tax rate (Pay-As-You-Earn) from 30 to 25 per cent.

Others include reduction of resident income tax (Corporation Tax) from 30 to 25 per cent, reduction of the turnover tax rate from the current three per cent to one per cent for all micro, small and medium enterprises (MSMEs) and reduction of the value added tax (VAT) from 16 to 14 per cent, effective from April 1.

Although some changes have been implemented by National Treasury Cabinet Secretary, Ukur Yattani, through a legal notice on the VAT change from 16 to 14 per cent, others must be taken to National Assembly for ratification.

Parliament meets tomorrow to discuss other proposals which touch on the income tax measures for approval.

Steve Okello, PwC Partner, says although the proposed changes are well intended, they are bound to increase the costs of certain goods and services to taxpayers and the government should factor this as the Bill is debated by stakeholders.

According to an analysis by PwC, if the Bill is enacted into law as it is, the overall net implication will be an increase in the prices of basic commodities such as milk, bread and medicaments and the timing could not have come at such a worse time.

Expanded definition

KPMG Partner, Tax and Regulatory Services, Peter Kinuthia says the implication of this new expanded definition implies that bread made out of any other ingredients other than those specified in the bill will now be subjected to VAT.

He also argues that whereas the intention of reducing corporation tax rate from 30 to 25 per cent is intended to ensure companies remain afloat during and after the Covid-19 pandemic, it lacks legal backing.

“The bill as currently drafted does not include a provision introducing the new corporation tax rate and therefore the directive from the President will not have legal backing should the Bill be passed in its current form,” Kinuthia says.

He says the intended reduction of the corporation tax rate is a welcome move for resident companies, but the corporate tax rate for non-resident companies operating branches in Kenya remains at 37.5 per cent even though they are also affected by the pandemic.

According to KPMG, the proposed provision of VAT on fuel and liquid petroleum gas intends to include excise duty, fees and other charges in computing the taxable value for fuel, which will increase the cost of fuel and LPG which may counteract the reduction of the VAT rate from 16 to 14 per cent.

“Further, the inclusion of excise duty and other charges in the computation of the VAT on fuel will significantly increase the VAT cost of fuel negating the decision to charge a lower VAT rate of 8 per cent,” KPMG says in their analysis.

The analysis indicates that the move will trigger an increase in consumer prices of most products that use fuel in the manufacturing process as well as thousands of homesteads, hotels that rely LPG as source of cooking energy.

Proposed reduction

 On withholding tax, KPMG says the proposal that withholding tax on dividends be paid to non-resident persons from 10 to 15 per cent will claw away the benefit from the proposed reduction of the corporation tax rate, with foreign persons operating in Kenya through subsidiaries or branches now subject to higher tax rates compared to local companies.

 “The proposed change will now favour companies from countries with whom Kenya has signed Double Tax Agreements as they will continue to enjoy lower withholding tax rates,”the firm adds.

 According to KPMG the higher withholding tax rates will make it harder for Kenya to attract foreign direct investments especially in the era of the Africa Continental Free Trade area where companies can set base in countries with advantageous corporation tax regime but still have access to the wider Africa market, including Kenya.