New Finance Bill 2023 Introduces Tax on Cash Allowances, 5 Other Sectors [LIST]

Njuguna Ndung'u and Ruo
Cabinet Secretary for National Treasury and Economic Planning Prof. Njuguna Ndung'u (Left) and President William Ruto (Right) at former Deputy Presidential Home in Karen on July 24, 2022.

The National Treasury, on Thursday, May 4, proposed new taxes on several goods, including fake beards, artificial nails and per diem allowances.

According to Finance Bill 2023, seen by, Treasury Cabinet Secretary Njuguna Ndung'u proposed an amendment to Section 5 of the Income Tax Act to ensure employees' per diem, known as cash allowances, were duly taxed.

The new proposal will grant the government a legal mandate to partner with employers to establish a working mechanism to see employees pay their fair share.

"Where such an amount is received by an employee as payment of traveling allowance to perform official duties, the standard mileage rate approved by the Automobile Association of Kenya shall be deemed to be reimbursement of the amount so expended and shall be excluded in the calculation of the employee’s gains and profits," CS Njuguna proposed.

President William Ruto at the Kenya-Japan press briefing, in State House, Nairobi, on May 3, 2023.
A photo of President William Ruto at the Kenya-Japan press briefing, in State House, Nairobi, on May 3, 2023.

Cash allowances paid to employees were previously not subject to income tax under the Pay-As-You-Earn (PAYE) system.

"One such instance is the amount paid to an employee when outside their usual place of work but on official duty, also known as per diem. In this case, the first KSh2,000 paid to an employee per day is not taxable. It is treated as reimbursement of expenses," the government explained in the 2021 tax plan.

Finance Bill 2023 will require employers to deduct and remit income tax on cash allowances paid to their employees as part of the taxes that must be filed.

Cash allowances can be in the form of bonuses, commissions, or other payments made to employees in addition to their regular salary ranging from transport, housing, and hardship per diems. 

The tax treatment of cash allowances depends on the nature of the per diem. For instance, transport allowances are taxable up to a certain limit set by the government, while housing and hardship are taxable in full.

The taxable amount is determined by subtracting any exempt amount from the total amount of the cash allowance. Employers are required to withhold the appropriate amount of tax from the cash allowance at the time of payment and remit it to the Kenya Revenue Authority (KRA) on a monthly basis.

Failure to deduct and remit the correct amount of tax can result in penalties and interest charges. It's recommended that individuals seek the advice of a tax professional or consult the KRA website for more information on the tax treatment of cash allowances in Kenya.

Other Proposed Taxes

The Finance Bill 2023 also revised income tax, value-added tax (VAT), excise duty, customs and excise taxes, and property taxes.

A photo of President William Ruto and COTU boss Francis Atwoli during the Labour Day Celebrations at Uhuru Gardens on May 1, 2023

Income tax: This is a tax on the income earned by individuals, partnerships, companies, and trusts. The tax rates for individuals range from 10 to 35 per cent depending on the income bracket, according to the Finance Bill 2023.

To this end, the National Treasury proposed an amendment to the Employment Act of 2007 to provide a 35 per cent income tax on all monthly salaries above Ksh500,000.

It, therefore, means that an individual earning Ksh500,000 per month will have to give the government a cool Ksh175,000 in income tax, that is, minus other taxes.

Njuguna also proposed a 3 per cent deduction of basic salaries towards the National Housing Development Fund, which employers will have to match with another 3 per cent.

Treasury proposed that those not eligible for the affordable housing programme will have to accrue their savings over seven years, after which their first deductions will be given to them or upon retirement, whichever comes first.

Value-added tax (VAT): This is a tax on the value added to goods and services at each stage of production and distribution. The VAT rate in Kenya is currently 16 per cent.

"Where a bona fide owner of taxable supplies, who has deducted input tax under subsection (1), is compensated for the loss of the taxable supplies, the compensation shall be treated as a taxable supply, and if the compensation includes value-added tax, the compensation shall be declared, and the value-added tax thereon remitted to the Commissioner.

"If the compensation does not include value-added tax, the compensation shall be declared and subjected to value-added tax and the tax remitted to the Commissioner.

Excise duty: A tax on specific goods such as bear, tobacco, and petroleum products. The rate of excise duty varies depending on the type of product.

In this regard, the government will tax wigs, human hair, false beards, eyebrows and eyelashes at a 5 per cent excise duty.

Customs and excise taxes: These are taxes levied on imports and exports. The rates of customs and excise taxes vary depending on the type of goods.

Property taxes are taxes on the value of properties such as land and buildings. The property tax rate varies depending on the location and value of the property.

It's important to note that there are other taxes, such as withholding tax, stamp duty, betting, gaming taxes and digital asset tax. 

The property tax rate in Kenya ranges from 0.1 per cent to 0.4 per cent of the market value of the property, depending on the location and use of the property. For example, residential properties are generally taxed at a lower rate than commercial or industrial properties.

Property owners are required to pay the property tax on an annual basis, and failure to do so can result in penalties and interest charges. The county government may also take legal action to recover the unpaid taxes.

"Subject to this Schedule, income in respect of which tax is chargeable under section 3(2)(f) is the whole of the gains which accrued to a company, an individual or partnership on or after the 1st January, 2015, on the transfer of property situated in Kenya, whether or not the property was acquired before 1st January, 2015.

"Taxation gains derived from the alienation of shares or comparable interests, including interests in a partnership or trust, if, at any time during the three hundred and sixty-five days preceding the alienation, the shares or comparable interests derived more than twenty per cent of their value directly or indirectly from immovable property situated in Kenya, or gains, other than those to which subparagraph (a) applies, derived from the alienation of shares of a company resident in Kenya if the alienator, at any time during the three hundred and sixty-five days preceding such alienation, held directly or indirectly at least twenty per cent of the capital of that company," read part of the Finance Bill 2023. 

Digital assets like cryptocurrencies are subject to taxation under the Income Tax Act. Treasury considers digital assets a property, and any gains realized from their sale, exchange or disposal are subject to capital gains tax (CGT).

The CGT rate in Kenya is currently 5 per cent for gains above Ksh500,000. This means that if an individual gains Ksh600,000 from the sale of digital assets, they would be required to pay CGT of 5 per cent on the amount above Ksh500,000, which is Ksh5,000.

It's important to note that individuals must keep accurate records of their digital asset transactions, including the date of acquisition, cost of acquisition, and proceeds from the sale or disposal of the assets. This information should be used to calculate the CGT liability.

Additionally, if an individual trades or mines digital assets, the income earned from these activities is subject to income tax. The income tax rate for individuals in Kenya ranges from 10 to 30 per cent, depending on the income bracket.

Marketing services will be subject to a 5 per cent withholding tax, while digital content monetisation will be subject to a 15 per cent withholding tax.

"Digital asset” includes anything of value that is not tangible and cryptocurrencies, token codes, and numbers held in digital form and generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration that can be transferred, stored or exchanged electronically; and a non-fungible token or any other token of similar nature, by whatever name called; and the income derived from transfer or exchange of a digital asset” means the gross fair market value consideration received or receivable at the point of exchange or transfer of a digital asset," read part of the Finance Bill 2023.

The government also offers tax incentives to encourage investments in certain sectors of the economy.

Treasury CS Njuguna Ndung'u during a meeting with UN officials at his office on February 24, 2023.
Treasury CS Njuguna Ndung'u during a meeting with UN officials at his office on February 24, 2023.
The National Treasury