New Tax Increase on Employed Kenyans That Went Unnoticed

  • Kenya Revenue Authority Offices along Mombasa Road, Nairobi.
    Kenya Revenue Authority Offices along Mombasa Road, Nairobi.
  • Employed Kenyans were slapped with a 30% tax rate at the end of January 2021. This is after the second Tax Laws (Amendment) (No.2) Bill, 2020, came into effect.

    The amendment proposed various changes to the Income Tax Act and the Value Added Tax Act.

    During the revision of taxes in December 2020, Parliament introduced changes to the tax laws that reduced the number of tax bands to just three and slapped a 30% tax rate on any amounts above Ksh 32,333.

    File image of Kenyan bank notes
    File image of Kenyan bank notes

    The key changes proposed by the Bill are the reinstatement of: 

    (i) the resident corporate income tax rate to 30% from the current 25%; and 

    (ii) the highest individual income tax band to 30% from the current 25%.

    Below is a summary of all the key tax proposals included in the Bill and what it means for Kenyans.

    Corporate income tax (Minimum tax)

    The Bill sought to correct a drafting anomaly in the Finance Act, 2020 which introduced a minimum tax. 

    It is now clear that the minimum tax will be payable when the installment tax is lower than the minimum tax payable.

    While the proposal has provided much-needed clarity, the fact that the law does not provide some reprieve to loss-making entities either due to capital allowances or immediately following incorporation, leaves room for further alignment with economic circumstances.

    Kenyans walking in Nairobi on Monday, March 23, 2020
    Kenyans walking in Nairobi on Monday, March 23, 2020

    "The minimum tax is meant to ensure that companies that make perpetual losses also contribute towards the provision of infrastructure and essential services by the government,

    "The rationale for this tax is that even where companies are making losses, they continue enjoying facilities, such as infrastructure, whose cost of construction continue being serviced by the Government," reads an excerpt from the Bill.

    Corporate income tax rate

    The Bill proposed an increase in the corporate income tax rate for resident persons from 25% to 30%. The higher rate applies to income earned from January 1, 2021.

    This created a challenge for organizations whose financial years end on dates other than December 31, since they will earn income that will be subject to two different tax rates depending on the period in which it is accrued.

    Employment tax (Individual tax rates)

    The Bill revised the individual income tax brackets by increasing the highest tax rate to 30% from the current 25%.

    The reversal to the tax relief has resulted in lower disposable income at a time when the finances of most individuals have been greatly affected by the pandemic.

    According to the Kenya Revenue Authority (KRA), the new 30% individual income tax rate applies to all income amounts in excess of Ksh 32,333 per month or Ksh 388,000 per year.

    "The following tax rates shall apply to individual income with effect from January 1, 2021. The first monthly PAYE return under the new rate shall be due by February 9, 2021, the taxman stated.

    Pension withdrawal tax rates

    The Bill proposed to increase the highest tax band on pension withdrawals from the current 25% to 30% for amounts above Ksh 1,600,000 when withdrawn after 15 years or when the other prescribed conditions are met by an individual.

    Pension band (Ksh)                  Applicable tax rate (%)

    On the first 400,000                                10

    On the next 400,000                               15

    On the next 400,000                               20

    On the next 400,000                               25

    Income above 1,600,000                        30

    Digital services tax

    The government introduced a tax on digital services from two fronts; an income tax front and a VAT front.

    The Finance Act 2020 introduced a digital services tax (DST) on income from services provided through a digital marketplace in Kenya at the rate of 1.5% on the gross transactional value. 

    This was followed by the issuance of the Income Tax (Digital Service Tax) Regulations, 2020 which became effective on January 2, 2021.

    The DST shall be payable by the digital service provider or the digital marketplace provider or the tax representative. 

    "A person liable to pay DST must submit a return in the prescribed form and remit the tax due by the 20th day of the month following the end of the month in which the digital service was offered. The Commissioner may appoint a taxpayer as a DST agent to withhold and remit the tax to the KRA," reads a statement issued by the revenue authority.

    DST paid by a non-resident person without a permanent establishment in Kenya is a final tax. 

    On the other hand, tax paid under this regime by a resident person or a permanent establishment of a nonresident person shall be offset against the income tax payable for that year of income.

    Online services that facilitate payments, lending, or trading of financial instruments, commodities or foreign exchange carried out by licensed financial institutions or approved financial service providers are exempt from DST.

    Taxpayers who operate in the digital space and those who render services digitally should review how the introduction of DST will impact their operations.

    A man working using a laptop. Following the Covid-19 outbreak, working from home is the new normal
    An individual using a laptop