President William Ruto's administration on Thursday, May 4, proposed a new tax regime and terms on several goods, services and income earners.
In the Finance Bill 2023 that was prepared by National Treasury, the Kenya Kwanza government wants landlords to pay their taxes within 24 hours after receiving rental incomes.
The Bill came under sharp focus by financial analysts including Deloitte, whose experts observed that it will compel tax agents who are working for landlords to remit withholding tax to a Commissioner on behalf of property owners.
"To submit the information specified in an invalidation notice during the objection stage of a tax dispute within 24 hours," Deloitte stated.
As a requirement, agents will deduct and remit rental income tax within 24 hours after receiving the payment from tenants who reside within the houses.
It was the first time that withholding tax had been introduced on rental income collected by agents who are appointed by a Commissioner in charge of domestic taxes from the Revenue Authority.
“A person who deducts rental income tax under this section shall, within twenty-four hours after the deduction was made remit the amount so deducted to the Commissioner together with a return in writing of the tax deducted and such other information as the Commissioner may require,” reads part of the Finance Bill, 2023.
Deloitte analysts observed that the new tax proposal may complicate issues for Property Agents who will have to work against the deadline set for the 20th day of every month.
“The Commissioner shall, upon receipt of the amount remitted under subsection (3AB), furnish the person from whom the rental income tax was withheld with a certificate stating the amount of the rent and tax deducted therefrom,” reads the Finance Bill, 2023.
The Finance Bill 2023 also seeks to impose daily remittance of excise duty on firms with a history of falsifying actual sales through self-declaration of taxes on returns.
Presently, the tax on rental income is governed by the Income Tax Act, which requires landlords to declare rental income on their tax returns and pay taxes on it.
The tax rate for rental income in Kenya is progressive, meaning that the more income you earn, the higher your tax rate will be. For the 2021/2022 tax year, the tax rates for rental income are as follows:
i) 10 per cent for rental income up to Ksh288,000
ii) 15 per cent for rental income between Ksh288,001 and Ksh500,000
iii) 20 per cent for rental income between Ksh500,001 and Ksh750,000
iv) 25 per cent for rental income between Ksh750,001 and Ksh1,000,000
v) 30 per cent for rental income above Ksh1,000,000
Landlords are also required to register for a Personal Identification Number (PIN) with the Revenue Authority and to file annual tax returns by June 30th of each year.
Additionally, landlords are required to keep accurate records of their rental income and expenses to help with the tax calculation.
"In our view, the requirement to remit taxes within 24 hours or 3 days will be administratively cumbersome to the taxpayers and may require the taxpayers to incur additional costs to achieve compliance," Delloite observed.
Understanding Withholding Tax
A withholding tax is a tax deducted at the source from certain types of income before the recipient receives the payment. The withholding tax system is a method used by the government to ensure that tax revenue is collected from various sources of income, such as salaries, rent, and dividends.
The types of income subject to withholding tax in Kenya include:
Dividends: Dividends paid to resident shareholders are subject to a withholding tax of 5 per cent, while dividends paid to non-resident shareholders are subject to a withholding tax of 10 per cent.
Interest: Interest paid to resident individuals and non-resident persons is subject to a withholding tax of 15 per cent, while interest paid to resident companies is subject to a withholding tax of 10 per cent.
Rent: Rent paid to non-residents is subject to a withholding tax of 30 per cent, while rent paid to residents is subject to a withholding tax of 10 per cent.
Royalties and management fees: These payments are subject to a withholding tax of 20 per cent.
It's worth noting that, currently, the withholding tax is deducted by the payer of the income and remitted to the Revenue Authority within the first 20 days of the following month.
The recipient of the income can then claim a credit for the withholding tax against their final tax liability when filing their annual tax returns.
