Treasury tabled the Finance Bill 2023 before the National Assembly on Thursday, 4 May, and made a raft of proposals geared towards expanding the tax base and raising revenues to meet the government’s ambitious budget of K3.6 trillion for the year 2023/2024.
Largely, a pointer to the priority sectors the government is targeting to grow, the Finance Bill 2023, extensively purposed to change Advance Tax to maximise revenue collection.
In Kenya, advance tax is a system of prepayment of income tax by taxpayers based on their estimated tax liability for the current tax year.
In the Finance Bill 2023, it was proposed that owners of Passenger Vehicles (PSVs) pay a higher rate of Ks100 per passenger per month or Ksh5,000 per year.
The current is Ksh60 per person per month or Ksh2,400, which a passenger vehicle owner must pay before filing returns.
In return, Public Service Vehicle (PSV) owners could increase matatu fares to compensate for the increased tax rates.
The Bill further proposed that owners of cargo vehicles pay a higher rate of Ksh3,000 per ton per year or Ksh5,000 per year.
Currently, the Law requires owners of cargo vehicles to pay Ksh1,500 per ton per year before filing a return to the Revenue Authority.
"The rate of advance tax under section 12A shall be— (a) for vans, pick-ups, trucks, prime movers, trailers and lorries: one thousand five hundred shillings per ton of load capacity per year or two thousand four hundred shillings per year, whichever is the higher.
"Provided that advance tax shall not be imposed on tractors or trailers used for agricultural purposes; (b) for saloons, station-wagons, mini-buses, buses and coaches: sixty shillings per passenger capacity per month or two thousand four hundred shillings per year, whichever is the higher," Finance Bill 2023.
If passed into Law, the proposal to increase the tax revenues derived from the advance tax levied on commercial vehicles will come to effect on January 1, 2024.
Presently, advance tax is paid in instalments throughout the year, with the aim of reducing the financial burden on taxpayers when the final tax liability is due.
However, the Bill proposed to amend the advance tax payable on passenger and commercial vehicles, excluding tractors and trailers used for agricultural purposes.
Advance tax is applicable to taxpayers who expect to have a tax liability of Ksh40,000 or more in the current tax year. These taxpayers must pay their advance tax in four equal instalments, due on the 20th of the fourth, sixth, ninth, and twelfth months of the tax year.
The amount of advance tax payable is calculated based on the estimated tax liability for the current year. The estimated tax liability is calculated by multiplying the taxable income for the year by the applicable tax rate, less any allowable deductions and tax credits.
It's important to note that the advance tax paid is treated as a credit against the final tax liability when the tax return is filed. If the advance tax paid exceeds the absolute tax liability, the excess amount can be refunded or carried forward to offset future tax liabilities.
Failing to pay the required advance tax instalments or underestimating the tax liability can result in penalties and interest charges. Therefore, taxpayers must estimate their tax liability accurately and pay the required advance tax instalments on time.