Highlights of the Finance Bill, 2023

The Finance Bill, 2023 has made several proposals in various sectors and sub-sectors that play a major role in spurring Kenya’s economic growth. Some of these sectors include but are not limited to manufacturing, digital and creative economy, climate change, petroleum products, tax administration, and housing among others. Some of the proposals in the Bill impacting these sectors are briefly highlighted as follows:

Manufacturing

The manufacturing sector contributes to over 40% of employment and Gross Domestic Product (GDP) in Kenya. The Bill provides for a number of reprieves to support the manufacturing sector and in particular local companies while at the same time increasing the cost of production on certain products.

Export and Investment Promotion Levy

The Bill introduces export and investment promotion levy rates on imported products such as cement clinkers, bars and rods of iron or nonalloy steel, and kraft papers among others. These products are critical in the construction industry such as the building of the proposed affordable houses by the government. These proposals, though have good intentions, could likely distort market competition where cement manufacturers may likely increase the cost of cement.

Excise Duty

In addition, to promoting development and local industries, the Bill proposes the imposition of excise duty on imported products such as; imported cement, furniture, cellular phones and paints. These proposals seek to protect the local industries especially local manufacturers of cellular phones which will promote innovation in technology.  

Contrary to the government’s agenda of reducing the cost of living, the Bill proposes an increase in excise duty on products such as sugar. Though this, the government qualified in the Budget Statement read by National Treasury Cabinet Secretary Njuguna Ndung’u, is meant to discourage the consumption of sugar associated with various ailments such as diabetes. The government ought to appreciate that there is a need to revamp local production to meet local demand. Sugar is used as a raw material by many products and an increase in excise makes sugar expensive which increase will mean passing the cost to the consumer. The National Assembly Departmental Committee on Finance and National Planning (the Committee) agreed to only impose Kshs 5 per kg on imported sugar.

Agriculture

The Bill though contrary to the government’s agenda on reducing the cost of living proposes to reclassify items related to agriculture such as raw materials supply for manufacturers of agricultural pest control products and fertilizers among others from zero-rating to VAT-exempt. The proposed reclassification will increase the cost of agriculture, especially for farmers. The Committee rejected the reclassification of these products.

Digital and Creative Economy

Mobile telephone penetration and innovation have enabled Kenya to increase to over 80 percent of the population in less than two decades, making Kenya one of the world’s leading users of mobile payments. To this end, the Bill proposes to reduce the excise duty rate on telephone and internet data services. The Bill also proposes to reduce excise duty on money transfer services by banks, agencies and other financial service providers from 20% to 15%.  However, the Bill to ensure rate harmonisation proposes to increase the rate from 12% to 15% on money transfer services by cellular phone service providers. This will lead to an increase in transaction fees on platforms such as M-Pesa and Airtel money which will have a negative impact on the consumers who rely on and use these platforms compared to financial institutions.

In addition, transactions of digital assets have over the years not been captured in the taxation system yet millions of shillings are transacted in digital forms. To this end and in efforts to expand the tax base, the Bill has introduced digital asset tax at the rate of 3%. This is a welcome move to ensure all transactions are in the tax net and that the government is able to collect revenue.

The Kenya Kwanza government in its manifesto committed to supporting the creative economy. However, the Bill proposes a 15% withholding tax on digital content monetization. Stakeholders who made submissions, before the Committee opposed the introduction of the 15% withholding tax arguing the need for rate harmonisation with other professions at the rate of 5%.

Climate Change

Stirring actions towards climate change and global warming are no longer inevitable. Bringing the matter closer home, President William Ruto recently announced Kenya’s stance on going 100% green by 2030. The Bill has adopted several proposals from stakeholders for instance by zero-rating the assembly of electric vehicles, and buses, Liquefied Petroleum Gas (LPG) and clean cooking stoves among others. This will go a long way in achieving Kenya’s Nationally Determined Contribution (NDC).  

Petroleum Products

The cost of living has been on the rise not only in Kenya but all over the world. The Bill proposes to increase VAT on petroleum products from 8% to 16%. This increase will have a ripple effect on the cost of living as it will increase the cost of production in effect leading to increased cost of products. Prof Ndung’u qualified this increase by stating that the continued 8% VAT charged on petroleum products will lead to a build-up of credits by oil companies who claim other input tax at the general rate of 16%. As a result, the oil markers have been in a perpetual credit position and not paying VAT to the Exchequer. The Committee, though noting the stakeholders’ submissions to reject the proposal, agreed to the increase in VAT on petroleum products for standardisation.  

Tax Administration

The Bill makes several proposals for ensuring efficient tax collection and administration. For instance, it proposes a penalty for failing to comply with the electronic tax system (E-TIMS). The Bill also proposes to disallow expenditure deductions on transactions not generated under E-TIMS this is to ensure compliance and transparency.

Further, the Bill proposes to require a party to a tax dispute to deposit 20% of the disputed amount as security. If this proposal is passed it will violate the right of access to justice hence unconstitutional and will affect business capital.

In addition, the Bill makes proposals in regard to the collection of revenue by requiring remission of revenue collected within 24 hours and further imposes a penalty for non-compliance. This proposal creates administrative hurdles which increase the risk of non-compliance. There is a need for retention as currently provided or an increase in the remittance period from the proposed 24 hours.

The Bill makes proposals towards compensation of claims on insured taxable supplies by disallowing an individual from claiming input VAT twice. The Bill proposes to treat the claim compensation as a taxable supply subject to VAT.

The Bill further proposes to increase the PAYE tax band under Income Tax Act from 30% to 35% for all persons earning an income of over Kshs 6,000,000. The Committee noted that this will widen the tax bracket and enable the government to collect additional revenue to the tune of 11.4 billion shillings. 

The Bottom-Up Economic Transformation Agenda (BETA)

Affordable Housing Levy

About 60% of Kenyans in urban areas are living in slums and other low-quality housing without adequate sanitation, undermining their dignity and exposing them to health and security hazards. Kenya’s urbanisation growth is at the rate of 4.4%, which means that the housing supply is a moving target.

The Bill proposes to introduce employee and employer contributions to the National Housing Development Fund at the rate of 3% of the employee’s monthly basic salary with the maximum contribution not exceeding Ksh. 5,000. The majority of Kenyans have opposed these proposed deductions which the Finance Committee agreed to reduce to a manageable rate of 1.5%.

Turnover Tax

The Bill proposes to increase the Turnover Tax to the pre-Covid rate of 3% from 1% and to reduce the minimum threshold to Ksh500,000 from Ksh1,000,000 and the maximum to Ksh15,000,000 from Ksh50,000,000.  The proposed provision will widen the bracket of taxpayers eligible to pay Turnover Tax. To cushion ‘hustlers’, the Committee agreed in its report to protect small businesses and ‘hustlers’ by increasing the Turnover Tax from the proposed Ksh500,000 to Ksh1,000,000 and agreed to increase the maximum threshold from the proposed Ksh15,000,000 to Ksh25,000,000.

Advance Tax

The Committee also agreed on the need to protect people in the transport business by reducing advance tax on vans, pick-ups, trucks, trailers and lorries from the proposed Ksh5,000 per year to Ksh3,000 per year.

Health Sector

Domestic pharmaceutical manufacturers have the capacity to manufacture a bigger share competitively but are hampered by the high cost of doing business and tax regime. To this end, the Committee agreed to delete inputs or raw materials (either produced locally or imported) supplied to pharmaceutical manufacturers in Kenya for manufacturing medicaments from VAT-exempt to zero rating.

Further, to incentive the healthcare sector, the Committee agreed to reduce the minimum bed capacity requirement from 100 to 50 for investors in the construction and equipping of specialized hospitals eligible for VAT exemption.