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Government set to roll back COVID tax relief measures in January 2021

Per statistics by the World Bank, Kenya is set for a relatively short setback from COVID-19 with a s 4 percentage-point dip in growth this year, and 5.2 percent growth returning in 2021. This is still a permanent loss of 5 percent of GDP over the two years compared to what was original projected, and other forecasts are worse according to the Fiscal Analytic Snapshot of 2020 provided by the Institute of Public Finance Kenya (IPFK) and Oxford Policy Management. 

This is set against a backdrop of budget deficits which have averaged 8 percent of GDP per year for the last 5 years. This is in part due to tax incentives such as differentiated corporate income tax implemented between 2011/2012 to 2018/2019 which has had an effect of tax base erosion. Moreover, the report notes the significant impact that tax expenditures and exemptions have had on the overall economy estimated at 5-6 percent of GDP annually. To try and reduce the deficit and ensure that revenue targets are being met, there have been concerted efforts in expanding the tax base by reining in the informal sector and the digital economy. As such there have been significant policy and legislative changes to reflect this drive such as the Income Tax (Digital Service Tax) regulations, 2020. However, despite these changes, owing to the COVID-19 Pandemic effect will lead to a narrowing of current account deficit to 4.5 percent of GDP as global trade disruptions, diverted capital spending and falling oil prices balance falling exports and a sharp decline in tourism receipts. 

That said, to cushion industries and protect the citizenry, the Government had effected fiscal policy changes in terms of incentives and reduced tax obligations. These included changes to the Income Tax Act and Value Added Tax which in essence reduced the corporate tax rate from 30% to 25% and reduced VAT from 16% to 14%. Owing to these and other tax breaks, National Treasury has estimated that the total foregone tax would rise to Kes. 172 Billion. As it stands, vide a Press Statement issued on 04th December 2020 the National Treasury Cabinet Secretary stated that as at 31st December, 2020 total foregone tax will amount to Kes. 65 Billion. “This will adversely impact on the government’s priority programmes under the Big Four Agenda and the recovery of the economy in general.”

Based on the foregoing, the Tax Laws Amendment Bill, 2020 has been tabled and a notice for public participation published with deadlines of 15th December, 2020. The bill contains changes which will affect corporate tax, Pay As You Earn and the Value Added Tax.

The Tax Laws Amendment Bill, 2020 seeks to make several changes to the following statutes:

  • The Income Tax Act (Cap. 470)
  • The Value Added Tax, 2013 (No. 35 of 2013)

The Income Tax Act (Cap. 470)

The Bill seeks to amend the provision on minimum tax to provide that it will apply only if it is lower than instalment tax.

The Bill also seeks to amend the Income Tax Act to amend the individual top rate tax and resident corporate tax rate. It is proposed to increase the top individual income rate and corporate income tax on resident companies from 25% to 30%.

Individual Tax Rate

AmountRate in each shilling
First Ksh. 288,00010%
Next Ksh. 200,00015%
Next Ksh. 200,00020%
Next Ksh. 200,00025%
All income above Ksh. 888,00030%

This provision shall apply to income earned from 1st January 2021

New Rates and Income Bands for Corporates

AmountRate in each shilling
First Ksh. 400,00010%
Next Ksh. 400,00015%
Next Ksh. 400,00020%
Next Ksh. 400,00025%
All income above Ksh. 888,00030%

The Value Added Tax, 2013 (No. 35 of 2013)

The Bill seeks to amend the Value Added Tax Act to amend the provision on credit for input tax against output tax. This means that a manufacturer may make a deduction for input tax with respect to taxable supplies made to an official aid funded project as approved by the Cabinet Secretary.

The questions that arise are in relation to the value in rolling back the tax breaks at this moment in time. As it stands, corporates especially MSMEs have already predicted losses owing to the prevailing environment are barely in recovery since the re-opening of the economy. Further, owing to high unemployment levels which according to the Kenya Bureau of Statics which doubled to 10.4 percent due to Covid will definitely impact on individuals’ purchasing power. 

Cognizant of the need to strike a balance between bridging fiscal deficit and creating an enabling business environment, pundits opine that it may be better suited to delay the proposed roll back plan by six months and effect the proposals in the new FY2021/2022 vide the Finance Act of 2021. In this regard Oxygene MCL held a stakeholders’ forum on 11th December to consider the likely impact of the proposed amendments. Premised on the discussions held, the company will put together an analyses of the same as part of its submissions to the National Assembly Finance Committee on 15th December, 2020. To participate in this process, kindly get in touch via Magdalene.Kariuki@oxygene.co.ke.  

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