Finance Bill, 2021

  • 14 May 2021
  • 15 Mins Read
  • 〜 by Acha Ouma


The Finance Bill, 2021 was published on 05th May 2021. The reason for publishing the Bill early, as was the case in 2020, was to comply with the ruling by Justice Winfrida Okwany referencing Petition Number 253 of 2018 where the court directed that it was mandatory that Treasury Cabinet Secretary to present both the budget estimates and Finance Bill to the National Assembly beginning of the Government’s fiscal year.

Further, by publishing the Bill ahead of time, it will provide for public participation through the Legislature and ensure that the proposed changes in tax can become effective by 01st July, 2021.

In summary, the Finance Bill provides for the collection of taxes assured through various existing laws on income taxes, excise duties, customs, duties and value added taxes. The main tax laws include: Income Tax Act, Excise Duty Act, Value Added Tax Act, Miscellaneous Fees and Charges law, and Tax Procedures Act.


In regards to the components of Kenya’s existing macro environment, a mention of the budget brings to mind macro-fiscal policies in terms of public expenditure, financial management, tax administration and policy.

Over the last 19 years, the Kenyan economy has experienced a steady economic growth averaging 5.2%. However, as would be expected, there has been a slump owing to the Covid-19 Pandemic. In fact, it is estimated that the Kenyan economy had at a point in time slowed down to a growth of o.6% due to adverse effects of the COVID-19 outbreak and its ensuing containment measures. The last time such a growth was recorded was in 2002 when the economy grew by 0.5% and improved to 2.9% in the next year.

Surprisingly, following the sharp decline of below 3% in 2020, the National Treasury and the IMF have issued what can be termed as exceedingly optimistic projections of up to 6.3% and 7.6% respectively. Question is, how will this be achieved?

Currently, there is a concern about financial management in Kenya. The public debt stands at Ksh. 7.4 Trillion with approximately 70% of Government projects expected to be financed through domestic borrowing facilitated through:

  • Taxation regime which has to continue supporting the financing of government initiatives. Taxes are the primary source of revenue for the government.
  • Local markets such as banks and public markets through treasury bonds issued.

By the end of June, the total public debt in Kenya will be about 7.6Trillion and going into the next FY the public debt will be Ksh. 8.6Trillion out of a Kshs. 12 Trillion economy; and in 2022-23 the public debt will have surpassed the debt ceiling that is currently at 9Trillion.

Pundits have expressed fears that the current levels are not only unsustainable but are indications that the country may be teetering on the brink of default.

In addition, to ensure that the Government is able to meet its obligations, it is estimated that for the incoming FY 2021-22, revenue collection including appropriation will be 1.9Trillion. this will be achieved through the following proposals: 

  • Definition of “Control”

The Bill proposes to provide a new definition of “control”. Though the word is used in the Act, its definition was inadvertently deleted when the previous Second Schedule to the Income Tax Act was repealed by the Tax Laws (Amendment) Act, 2020 and replaced with a new Second Schedule.

The proposed definition of “Control” provides that it shall mean the following when used in relation to a person: –

(a) that the person, directly or indirectly, holds at least 20% of the voting rights in a company;

(b) a loan advanced by the person to another person constituting at least 70% of the book value of the total assets of the other person excluding a loan from a financial institution that is not associated with the person advancing the loan;

(c) a guarantee by the person for any form of indebtedness of another constituting 70% of the total indebtedness of the other person excluding a guarantee from a financial institution that is not associated with the guarantor;

(d) the person appoints more than half of the board of directors of another person or at least one director or executive member of the governing board of that person;

(e) the person is the owner of or has the exclusive rights over the know-how, patent, copyright, trade mark, licence, franchise or any other business or commercial right of a similar nature, on which another person is wholly dependent for the manufacture or processing of goods or articles or business carried on by the other person;

(f) the person or a person designated by that person supplies at least 90% of the supply of the purchases of another person; or in the opinion of the Commissioner, influences the prices or other conditions relating to the supply of the purchases of another person;

(g) the person purchases or designates a person to purchase at least 90% of the sales of another person; or in the opinion of the Commissioner, influences the price or any other condition of the sales of another person; and

(h) the person has any other relationship, dealing or practice with another person which the Commissioner may deem to constitute control.

  • Definition of “infrastructure bond”

The Bill proposes to define the term, “infrastructure bond” to mean a bond issued by the Government for the financing of a strategic public infrastructure facility including a road, hospital, port, sporting facility, water and sewerage system, or a communication network. This is meant to provide clarity for tax purposes. For instance, if a bond qualifies as an infrastructure bond for purposes of exemption from tax of interest paid in such a bond, under the First Schedule to the Income Tax Act.

  • Definition of “permanent establishment”

The Bill proposes to amend the definition of “permanent establishment” to align it with best practice by expanding the scope so as to prevent instances of abuse by entities through artificial avoidance of permanent establishment status. It specifically seeks to: –

  1. address splitting of contracts in building and construction projects to avoid meeting the permanent establishment threshold;
  2. provide for a services permanent establishment;
  3. have a shorter period threshold for permanent establishment for exploration activities (in mining, oil & gas sectors) carried out within the country;
  4. address commissionaire arrangements where entities use dependent agents; and
  5. restrict the application of exceptions to permanent establishment status to activities that are of a preparatory or auxiliary nature.
  • Scope and definition of “digital marketplace”

The Bill proposes to amend the Act to provide more clarity that income accruing from a business carried out over the internet or an electronic network including through a digital marketplace is subject to tax.  The definition of the term “digital marketplace” is also proposed to be clarified. This will put Kenya in line with international best practice on taxation of income accruing through the digital economy.

  • Digital service tax (DST)

The Bill proposes to amend the current provisions on Digital Service Tax to provide that:

  1. Digital Service Tax will be applicable to income of non-resident persons only;
  2. The offsetting of DST against tax payable for that year of income by a resident person or non-resident with a permanent establishment is deleted.
  3. A person subject to digital service tax shall be required to submit a return and  pay  the tax  due  to the Commissioner  on  or before the 20th day of the month following the end of the month in which the digital service was offered;
  4. Digital Service Tax shall not apply to:
    • non-resident income arising from the business of transmitting messages by cable, radio, optical fibre, television broadcasting, Very Small Aperture Terminal (VSAT), internet, satellite or by any other similar method of communication chargeable under section 9(2); and
    • income subject to withholding tax under section 35 of the Income Tax Act.
  •  Loss carried forward

The Bill proposes to delete the provision limiting the period for carrying forward of losses. This is informed by the introduction of minimum tax which requires all entities to pay a minimum tax of 1% of their turnover where the minimum tax is more than instalment tax. Minimum tax ensures that even entities in perpetual losses pay a base tax hence addressing the aspect of companies in perpetual losses not contributing to the tax kitty.

  •  Introduction of interest restriction rule

The Bill proposes to repeal the provision on limitation of interest deductible expense using thin capitalization rules based on debt to equity ratios (3:1) and replace it with the interest to earnings ratio. The proposal is to limit the interest expense deductible to gross interest paid or payable to related persons and third parties not exceeding 30% of earnings before interest, taxes, depreciation and amortization of the borrower in any financial year.

This will apply to interest on all loans, payments that are economical equivalent to interest and expenses incurred in connection with raising the finance. However, any income which is exempt from tax shall be excluded from the calculation of earnings before interest, taxes, depreciation and amortization.

Deemed interest will also be allowed where the person is controlled by a non-resident person alone or together with not more than four other persons and where the company is not a bank or a financial institution licensed under the Banking Act

The interest/earnings ratio approach ensures that an entity’s net interest deductions are directly linked to the taxable income generated by its economic activities.

  •         Returns on activities in other jurisdictions

The Bill proposes to introduce a new section to provide for Country-by-Country Reporting (CbCR). This provision will require ultimate parent entities, of multinational enterprises (MNE), that are resident in Kenya to submit to the Commissioner financial reports on global operations of the MNE.

The provision will enable KRA to receive and exchange country by country reports on global operations of MNEs with presence in Kenya. These reports will facilitate KRA to assess transfer pricing risks and other base erosion and profit shifting related risks with respect to the MNEs operating in Kenya.

  • Insurance relief on contributions to National Hospital Insurance Fund (NHIF)

The Bill proposes to provide insurance relief of up to up to Kshs. 60,000 per year to persons upon contribution to the National Hospital Insurance Fund. This is to extend the insurance relief to individuals who pay premiums for health insurance to NHIF.

  • Set-off rebate for apprenticeship

The Bill proposes to expand the scope of set-off tax rebate for apprenticeship  to cover  employers  who  engage  at  least  ten  technical and vocational education and training (TVET) apprentices  for  a  period  of  six  to  twelve  months  during  any  year  of  income. The tax rebate has previously been applicable only to employers who engage university graduates.

  •   Special arrangements for relief from double taxation

The Bill proposes to amend the provisions restricting treaty benefits to individuals who are resident of Kenya’s treaty partners by replacing the words “an individual or individuals”  with the words “a person or persons” in recognition of the fact that beneficial owners can either be natural or legal persons.

  • Second Schedule

The Bill proposes the following amendments under the Second Schedule to the Income Tax Act which deals with Investment Allowance: –

  1. Replace the provisions on claims of investment allowance using reducing balance method with straight line method.
  2. Amend the definition of “manufacture” to expand the scope of electricity generation and distribution qualifying for investment allowance to any generation and distribution of electricity as opposed to limiting it to just electricity generated for supply and distribution through the national grid.  This will enable manufacturers generating electricity for their own use to enjoy investment allowance.
  3. Provide for definition of the term “civil works” to be used for purposes of Investment Allowance as including: roads and parking areas; railway lines and related structures; water, industrial effluent and sewerage works; communications and electrical posts and pylons and other electrical supply works; and security walls and fencing
  • Depreciation for machinery under a prospecting right

The Bill proposes to amend the Ninth Schedule to the Income Tax Act to align the rate of depreciation for machinery first used to undertake exploration operations to the rate provided in the Second Schedule to the Income Tax Act which is 50% in the first year of use and the balance to be claimed on an equal instalments basis. This is a clean-up sought to make reference to the right provision in the Second Schedule.

  • Withholding Tax on Service Fees and Management and Professional Fees.

The Bill proposes to align the rate of withholding tax payments made by licensees and contractors for service fees to non-residents sub-contractors in respect of mining or petroleum operations and for management, training and professional fees to non-residents at 10%. The current rate of withholding tax on service fees is 5.625% while that of management, training and professional fees is 12.5% creating opportunities for re-characterization of payments to take advantage of the lower rate. 

  • Definition of the term “Supply of imported services”

The amendment is meant to provide more clarity on the meaning of the term particularly where a registered person is entitled to fully claim input VAT on the supplies for a tax period, he shall not be required to account for VAT on imported services.

  • Scope and definition of Digital Market place

The Bill proposes to amend the Act to provide more clarity that supplies carried out over the internet or an electronic network including through a digital marketplace is subject to VAT.  The definition of the term “digital marketplace” is also proposed to be clarified.

  • Treatment of imported services  & when tax is due

The amendment to the sections is meant to make the accounting of VAT on imported services to cover both registered and non-registered persons.

  • Credit for input tax against output tax

The amendment is meant to ensure that application of section 17 is subject to all the other provisions of the VAT law and not just that section.

Further, the Bill proposes to extend the prohibition of claim of input tax upon acquisition of vehicles for purposes other than those provided in the section, to cover cases where the vehicles are also leased or hired.

  • VAT Registration & Deregistration

The Bill proposes to delete subsection (9) since the Cabinet Secretary is already provided with a general provision under section 67 enabling for making of Regulations for any provision of the Act.

  • Regulations for the better carrying of the provisions of the VAT Act

The Bill proposes to delete the provision on tabling of draft regulations before Parliament for approval since the procedure for the enactment of regulations is already provided for in the Statutory Instruments Act, 2013.

  • First Schedule to the Value Added Tax (VAT) Act 2013.

The Bill proposes amendments to the First Schedule to the VAT Act, 2013 as follows-

(a) Part I – exempt goods:-

the following exempt goods have been proposed to be deleted:-

    1. Disposable plastic syringes;
    2. Other syringes with or without needles;
    3. Airlid paper without super absorbent polymer –  due to duplication;
    4. Plain polythene film/PE;
    5. PE white 25-40gsm/release paper;
    6. 12-16 gsm spunbound piyropononwoven coverstock/15gsm spunbound PP non-woven SSMMS hydrophobic leg cuffs

Tariff Codes of Exempt Items under the First Schedule – This a clean up to ensure the correct tariff codes of exempt items are captured so that importers can enjoy the exemptions provided in law. This has been amended in paragraphs 39, 68, 70, 71, 72, 73, 74, 77, 78, 79, 80, 81, 82, 83 and 84.

Insertion of new paragraphs 112 to 133 comprising of additional exempt goods majority of which require approval of the Cabinet Secretary in charge of health.

Most of these exemptions are goods that are used in the health sector.

(b)    Part II:- Addition of the following to the list of exempt services

    1. the exportation of taxable services;
    2. the transfer of assets and other transactions related to the transfer of Assets into real estate investment trust and asset-backed securities.
  • Amendment to the Second Schedule to the Value Added Tax (VAT) Act, 2013

The following have been proposed for deletion:-

(a) The words “or taxable services” in paragraph 1 to restrict zero rating to exportation of goods.

(b) Supply of ordinary bread.

  • Definition of “compound”

A definition of the term “compound” has been introduced and referenced to the definition provided under the Compounding of Portable Spirits Act. The amendment provides clarity on what the term “compound” means in relation to spirits. Compounding of Portable Spirits Act is an Act of parliament that provides for control of portable spirits.

  • Definition of “possession”

A definition of the term “possession” in relation to excisable goods has been introduced. The definition is meant to clarify that possession not only includes having in one’s own physical possession but also owning or controlling excisable goods.  This definition is meant to ensure that actual owners and persons who have control over non-compliant products are held accountable.

  • Relief of excise duty on bulk data

The Excise Duty Act has introduced relief of excise duty in respect of internet data services that is paid by a licensed person who purchases the data in bulk for resale. This provision is meant to avoid double taxation by allowing a person who purchases internet data for resale to claim the excise duty they paid on the bulk data.

First Schedule to the Excise Duty Act.

The Finance Bill has proposed to make several amendments to the First Schedule to the Excise Duty Act, 2015 as follows-

  • Reintroducing excise duty on locally manufactured sugar confectionery.

This is meant to ensure that excise duty is imposed on both locally manufactured and imported sugar confectionaries in line with the EAC and WCO Treaties on non-discrimination. This also meant to minimize the negative externalities arising from consumption of sugar products as well as expand the tax base.

  • Re-introducing excise duty on white chocolate.

This is meant to ensure that excise duty is imposed on both locally manufactured and imported white chocolates in line with the EAC and WCO Treaties on non-discrimination. This also meant to minimize the negative externalities arising from consumption of sugar products as well as expand the tax base.

  • Removing excise duty on imported glass bottles.

Glass bottles are used as inputs in the manufacture of several products in the country. Currently, Kenya does not have capacity to produce all the types and quantities of glass bottles needed for bottling locally manufactured goods. Removal of excise duty is meant to support local industries in line with the Government’s big four agenda on growing the manufacturing sector.

  • Amending the rate of excise duty on motorcycles from a specific rate of Ksh 11,608.23 to an ad valorem rate of 15%.

This is meant to ensure equity and fairness by charging excise duty based on the value of the motorcycle as opposed to a flat specific rate for all types of motorcycles regardless of the value of the motorcycle.

  • Introduction of excise duty on jewellery made of precious metals.

This is meant to expand the tax base. It is important to note that the proposed excise duty will only apply to jewellery made of precious metals and will not affect jewellery made of other materials such as the ones made by the local artisans.

  •  Introduction of excise duty on products containing nicotine or nicotine substitutes.

This is meant to expand the tax base as well as ensure that novel products that contain nicotine or nicotine substitutes are also subjected to Excise Duty in line with the excise tax policy of imposing excise duty on all tobacco and nicotine products other than those used for medical purposes.

  • Re-introduction of excise duty on betting services.

This is meant to expand the tax base and also minimize the negative externalities arising out of betting activities which have over the years become very rampant in the country and mostly affecting the young people.

  • Amend the definition of “Other Fees”

The Bill proposes to delete the exclusion from excise duty granted on fees or commissions earned in respect of a loan. This is meant to expand the tax base by removing this exclusion and also discourage financial institutions from charging exorbitant fees for processing loans.


  • Section 3 of TPA– Definition of tax law

The Bill proposes to amend the definition of ‘tax law’ to include the Miscellaneous Fees and Levies Act 2016.

The inclusion of the Miscellaneous Fees and Levies Act in the definition will allow the application of the Tax Procedures Act 2015 in enforcement and recovery of the unpaid fees and levies in cases of non-compliance.


  • New Sections to provide for international tax agreements and common reporting standards obligations

The Bill proposes to introduce new sections on international tax agreements and compliance by financial institutions with due diligence procedures, record keeping requirements, identification of reportable accounts as well as to grant powers to the CS, National Treasury to make relevant regulations.

Any multilateral agreements and treaties that have been entered into by Kenya relating to international tax compliance and prevention of evasion of tax or exchange of information on tax matters shall have effect in the manner stipulated in those agreements or treaties. The amendment also provides for conditions for disclosure of such information specified in the agreements

More importantly the amendment provides a legal anchor for exchange of information for tax purposes in line with the current standards.

  • Record keeping

The Bill proposes to extend the period for retention of records from five years to seven years. This grants the Commissioner more time to carry out audit of tax records of taxable persons.

 In addition, the Bill proposes to amend the Unit of Currency for tax records to provide that the unit of currency in books of account, records, paper registers, tax returns or tax invoices in respect of a non-resident person carrying on business through a digital marketplace shall be in convertible foreign currency as may be approved by the Commissioner.

The proposal is meant to provide for use of a convertible foreign currency by non-resident persons trading through the digital marketplace who may have challenges keeping records in Kenya Shillings. The provisions do not apply to non-resident persons with tax representatives or non-resident persons with permanent establishments.

  • Relief in case of doubt or difficulty in recovery of tax.

The Bill proposes to provide that relief shall be granted if there is any other reason occasioning inability to recover the unpaid tax. The proposed amendment allows for consideration of any other reasons that may occasion inability to recover any tax due from a person.

The Bill further proposes to require the commissioner to submit a report twice a year to the CS National Treasury on or before the 30th June and on or before the 31st December of each year containing the details and amounts of taxes abandoned under the section.

  • Exemption of supplier in a continuous credit position from withholding tax obligations

The Bill proposes to amend the Commissioner’s powers to exempt any supplier from WHVAT obligations if such supplier has sufficiently demonstrated that due to the nature of his business, and due to the application of the section, he is going to be in a continuous credit position for a period of not less than twenty-four months. The provision is however not relevant going forward considering that the rate of WHVAT has been reduced from 6% to 2% and the fact that WHVAT is refundable.

  • Interest & penalty on overpaid tax

The proposed amendments are:

    1. interest or penalties shall not accrue on the amount applied to the payment of the outstanding tax from the date of the notification – after ascertainment.
    2. any outstanding tax after such application to accrue interest and penalties in accordance with the Act.
  •   Admissibility of Evidence

The proposed amendment is meant to allow for admission of evidence obtained as a result of inspection of records, goods etc by the Commissioner.

  • Due Date on submission of notice of objection electronically

The Bill proposes to provide that where a person submits a notice of objection or tax return in electronic form, the due date shall remain the date specified in the relevant tax law. The amendment enables the Commissioner to handle cases of electronic submission of tax objections which is currently not provided for.

  • Introduction of penalties for non-compliance to common reporting standards

The Bill proposes to introduce and provide for penalties for non-compliance with the provisions of Section 6A and 6B on common reporting standards obligations. The proposed amendment is aimed at ensuring compliance with the new provision.

  • Commissioner remedy to seek intervention of a relevant authority in the collection of tax such as DST

The Bill seeks to provide the Commissioner with a basis for seeking the intervention of a relevant authority in the collection of tax where a person who provides services over the internet or an electronic network including through a digital marketplace has not fulfilled the person’s tax obligations.

The proposed amendment provides a basis for seeking intervention from other government agencies in enforcement of tax laws.  

  • Concurrent civil and criminal proceedings

The amendment seeks to provide a basis in tax laws for continuance of both civil and criminal cases without either of them being stopped when arising out of the same issue.

  •   Protection of officers on reasonable cause

The proposed amendment is meant to protect officers of the Authority against suits being brought against them in cases of implementation of the law on the basis of goods faith.

  •   Transactions on which a PIN is required

The Bill proposes to obligate persons who trade through selling goods and services over a digital marketplace to apply for and obtain PINs from the Commissioner.

  •   Application of Tax Procedures Act, 2015 to excess tax

The Bill has proposed that the Tax Procedures Act, 2015 will apply cases of refunds, ascertainment and repayment of fees and levies overpaid or paid in error. Further, this will also provide for determination by the Commissioner of penalties and interests on fees that remain unpaid.

  •   Exemption from Import Declaration Fees (IDF) and Railway Development Levy (RDL)

The Bill proposes to exempt such other goods of which the Cabinet Secretary may determine is in the public interest, or to promote investment and the value of which shall not be less than 5 billion shillings from payment of IDF and RDL.


Reward on to any person who provides information leading to the identification or recovery of unassessed taxes or duties

The Bill proposes to increase the maximum reward for information leading to the identification of unassessed taxes from Ksh. 100,000 to Ksh. 500,000   and also for information leading to recovery from Ksh. 2 million to Ksh. 5 million..