Taxes in Kenya: Different Types of Taxes

  • Let’s be honest, if taxes were optional, no one would ever pay them.

    The word tax tends to be very intimidating for most citizens especially since phrases such as “penalties” and “the government will find you” are usually associated with it.

    So what are taxes? Why should you pay them? And who should you pay them to?

    Tax is a financial charge that is often imposed by either the national or county governments on individuals or businesses aimed at funding public expenditures.

    The Kenya Revenue Authority (KRA) is the body mandated with collecting, assessing and accounting for the revenue in Kenya on behalf of the state.

    Kenyans generally pay two types of taxes: Direct and indirect taxes.

    Direct taxes are the amounts you remit directly to the government as income tax.

    Indirect taxes are those charges that you pay when you buy goods and services and they include Value Added Tax (VAT), excise duty, and custom taxes.

    When should you start paying taxes?

    1. Income tax

    As long as you are 18 years old, and have an income, you are required by law to pay and submit your taxes.

    Here is a breakdown of the Income-tax

    Income tax is imposed on;

    • Business income from any trade or profession
    • Employment income
    • Rent income
    • Investment income
    • Income from services rendered among others
    • Pensions among others

    How is Income tax collected?

    Income tax is collected in different methods based on the companies’ sources of income.These methods include:

    a.) Corporation Tax

    This is a form of Income Tax that is levied on corporate bodies such as Limited companies, Trusts, and Co-operatives, on their annual income.

    Companies that are based outside Kenya but operate in Kenya or have a branch in Kenya pay also pay Corporation Tax on income accrued within Kenya only.

    b.) Pay As You Earn (PAYE)

    This is a method of collecting tax at source from individuals in gainful employment.

    Companies and Partnerships with employees are required to deduct tax according to the prevailing tax rates from their employees’ salaries or wages on each payday for a month and remit the same to KRA on or before the 9th of the following month.

    You should note that PAYE applies to bonuses, directors’ fees, commissions, weekly wages, and monthly and annual salaries.

    Every employee is eligible for a tax credit often referred to as a personal relief. Also, KRA offers insurance and mortgage relief for qualified individuals.

    Furthermore, the KRA expects the taxpayer to file their returns after every year, before 30th June.

    How does KRA calculate PAYE?

    The monthly taxable income varies for everyone depending on the amount of their income.

    For instance, a taxpayer earning Kshs 11,180 and below will remit 10 per cent of their earnings to KRA.

    Somebody earning Kshs 11,181 to Kshs 21,714 will remit 15 per cent.

    A Kenyan earning Kshs 21,715 to Kshs 32,248 is required to pay 20 per cent of their earnings to KRA while those earning Kshs 32,249 to 42,781 are supposed to pay 25 percent of their total earnings to the taxman.

    Kenyans earning Kshs 42,782 and above will remit 30 per cent of their gross salary to the KRA.

    c.) Withholding Tax (WHT)

    This kind of tax is deductible from certain classes of income at the point of making a payment, to non-employees.

    Companies and partnerships making these payments are responsible for deducting and remitting the tax to the Commissioner of Domestic Taxes.

    WHT is chargeable on:

    • Dividends
    • Royalties
    • Management or professional fees (including consultancy, agency or contractual fees)
    • Commissions
    • Pensions
    • Rent received by non-residents
    • Other payments specified

    How much rate do residents pay on WHT taxes?

    • Dividend Income (10%)
    • Quality Dividend (5%)
    • Royalties (5%)
    • Consultancy/agency fees (5%)
    • Contractual fees (3%)
    • Interest from bearer instruments (25%)
    • Interest from government bearer bonds (15%)
    • Qualifying interest from housing bonds (10%)
    • Qualifying interest from bearer instruments (20%)
    • Insurance brokers’ commissions (5%)
    • Insurance Agents Commissions (10%)

    How much rate do non-residents pay on WHT taxes?

    • Dividend Income (15%)
    • Royalties (20%)
    • Rent Premium for Immovable Property (30%)
    • Rent Premium for Movable Property (15%)
    • Management and Professional Fees (20%)
    • Pension/retirement annuity (5%)
    • Appearance or performance fees (20%)
    • Supporting/arranging an appearance (20%)
    • Management or Professional fees (12.5%)
    • Interest on bearer instruments (20%)

    2. Advance Tax

    This is a tax paid in advance before a public service vehicle or a commercial vehicle goes for the annual inspection.

    This is a tax is paid in advance and caters to the public service vehicles and matatu.

    The owners pay the tax in advance before they can register their commercial vehicles (PSV).

    The Current rates for vans, trucks, lorries, pickups are  Kshs. 1500 or Kshs 2400 per ton of load capacity per annum.

    The rates for station wagons, saloons, minibuses, coaches are Kshs 60 per passenger capacity each month, or Kshs 720 per passenger per annum.

    3. Installment Tax

    Installment tax is paid by persons who have tax payable for any year that amounts to Kshs. 40,000 and above.

    4. Rental/Residential Income Tax

    This is a tax charged on rental income received from renting out property. Taxation of rental income depends on how the rented property was used for residential or commercial purposes.

    Companies and Partnerships that rent out property to other persons for either residential or commercial use are required to pay income tax on rent received

    To facilitate compliance, KRA appoints agents to withhold and pay, a percentage of the gross rent as the tax. These agents can be verified via the agent checker on iTax.

    5. Value Added Tax (VAT)

    Value Added Tax is charged on the supply of taxable goods or services made or provided in Kenya and on the importation of taxable goods or services into Kenya.

    While companies & partnerships can voluntarily register for VAT they MUST register if their annual revenue exceeds Kshs. 500, 000.

    To facilitate compliance, KRA appoints agents to withhold and pay, VAT on supplies made. These agents can be verified via the agent checker on iTax.

    6. Excise Duty

    The indirect charge administered on the sale of certain goods such as cigarettes or beer is the excise tax. Each of the 47 county governments administers taxes.

    Products and services charged are:

    • Excisable goods produced by licensed manufacturers in Kenya
    • Excisable services by authorized service providers in Kenya
    • Excisable goods brought into the country (imports)

    Each of the 47 county governments administers taxes.

    The List and types of Excisable goods and services are listed in the 5th Schedule as read together with Section 117 (1) (d) of the Customs and Excise Act, CAP 472 Laws of Kenya. They include;

    Mineral water, Juices, soft drinks, cosmetics and Preparations for use on hair, other beer made from malt, Opaque beer, mobile cellular phone services, fees charged for money transfer among others.

    7. Capital Gains Tax (CGT)

    This is a form of income tax which is charged on a net gain that a business makes after a sale of land or building.

    8. Agency Revenue

    This is a type of payment that KRA collects on behalf of various revenue collection agencies in Kenya.

    The two types of Agency Revenue include;

    9. Stamp Duty

    Stamp duty is a tax charged on transfer of properties, shares, and stock.

    It is collected by the Ministry of Lands, which has seconded the function to Kenya Revenue Authority (KRA).

    10. Betting and Pool Tax

    This is a tax charged on winnings from betting, gaming and lottery activities.

    Betting, gaming, and lottery businesses are required to withhold tax and pay to KRA, a percentage of the winnings being paid out to winners.

    So how does the government spend taxes in Kenya?

    1. Redistribution of Income

    Kenya has a progressive tax structure whereas income increases one pays a high percentage of taxes. Since high-income earners pay slightly more than the low earners, taxation enables the redistribution of incomes in the economy. 

    2. Controlling Externalities 

    An externality refers to a byproduct or consequence of activity (commercial or industrial) felt by a third party like pollution.

    In a bid to discourage negative externalities such as noise pollution, governments can impose a tax.

    3. Revenue generation

    By taxing citizens, the government can generate money that can be spent to improve the lives of the citizens or to cater for any other government expenditure.

    Some areas where the government uses taxes include the provision of social welfare and infrastructure development.

    4. Finance Debts

    A fraction of the revenues generated go to financing the debts accrued by the government.

    5. Representation 

    The people choose the government to represent them to ensure responsible management of their taxes. 

    6. Repricing 

    Taxation can help reprice goods and services deemed to be incorrectly priced such as alcohol, and tobacco.