Taxation in Kenya 2023

Below are the taxes currently levied in Kenya.

Income Tax 

Income tax in Kenya is imposed on different categories or sources of income. It is charged for each year of income, upon all the income of a person whether resident or non-resident, which is accrued in or derived from Kenya.

Under the Kenyan tax system, the categories of income are: 

1. Gains or profits from a business, employment or services rendered and a right granted to another person for use or occupation of property;
2. Dividends or interest;
3. Income accruing through a digital marketplace; 
4. An amount deemed to be the income of a person under the Act or by rules made under the Act; 
5.  Any gain as determined under the Act, which accrues to a company or an individual on the transfer of property situated in Kenya;
6. The net gain derived on the disposal of an interest of a person that derives 20% or more of its value, directly or indirectly, from immovable property in Kenya; and 
7.  A natural resource income.

Individuals and corporate bodies are the primary units of income taxation, which is a direct tax. Individuals are taxed on their income through the graduated rate while companies are taxed at a general rate of 30.0 percent for residents and 37.5 percent for non-residents.

Value Added Tax

Value Added Tax is a consumption tax levied on taxable goods and services made or provided in Kenya and supplied or imported into Kenya. The tax is levied at every stage in the supply chain where value is added. Any person, individual, company, or partnership that has supplied or is expected to supply taxable goods worth KShs 5 million is required to register and charge VAT. Nonetheless, a trader with a turnover of less than KShs 5 million is allowed to register for VAT on a voluntary basis.

Excise Duty 

Excise Duty is levied on excisable goods manufactured in Kenya by a licensed manufacturer, excisable services provided in Kenya by a registered person and on excisable imported goods. Rules governing the imposition of excise duty are contained in the Excise Duty Act, 2015.

The duty is mostly levied on goods that the Government may want to discourage their use or consumption and luxury goods and services. 

The First Schedule to the Excise Duty Act, 2015 provides lists of excisable goods and services which is the scope of excise duty in Kenya. The major excisable items include petroleum products, alcoholic products, cigarettes, tobacco, soft drinks, airtimes, financial transactions, and automobiles. Conventionally, the duty is levied to address the negative externalities that some goods/services tend to have. 

The tax is also used by the Government to meet revenue requirements.

Taxes on imports

These include Import Duty, Import excise duty and Import VAT.

Import duty in the East African Community (EAC) is governed by the East African Community Customs Management Act (EACCMA), 2004 and the East African Community Customs Management Regulations, 2010. Kenya as member of the EAC Community applies the duty rates as provided in the East Africa Community Common External Tariffs (EAC CET). The primary basis of determination of customs duty liability is the Cost, Insurance and Freight (CIF) value of imported goods. 

Import excise duty is levied on excisable goods imported by licensed importer and excisable services imported by a registered person. Laws and regulations governing the imposition of excise duty are contained in the Excise Duty Act, 2015. 

Import VAT is charged on imported goods and services. Application and imposition on Value Added Tax (VAT) is governed by VAT Act, 2013. Imported goods and services are taxed at the same rates as domestic supplies. The goods and services exempted from VAT are specified in the First and Second schedule of the VAT Act, 2013. The standard rate of VAT is 16% of the taxable value, however, oils and zero-rated supplies attract a lower rate of 8% and 0% respectively.

The Finance Bill 2023

The National Treasury tabled the Finance Bill, 2023 before the National Assembly on Thursday, 4 May 2023.

The Bill proposes a raft of tax changes which are geared towards expanding the tax base and raising revenues to meet the government’s ambitious budget of KES 3.6 trillion for the year 2023/2024. The proposals are also a pointer to the priority sectors which the government is targeting to grow the economy and ease the cost of living.

In the recent past, the government has struggled to meet its expenditure requirements and in some of the proposals the government is seeking t to increase taxes to bridge its fiscal deficit.

Some of the notable changes include:

Introduction of an export and investment promotion levy on specified imports

The Bill proposes to introduce a levy on goods imported into the country for home use at 10% of the customs value of the goods under the Third Schedule to be payable by an importer of such goods. Some of the goods included in the Third Schedule include bars and rods or iron, Kraft paper, sacks and bags and cement clinkers effective 1st July 2023.

Goods imported from the East African Community shall be exempt from the export and investment promotion levy.

The proposed introduction of the levy will protect the local market and stimulate growth of the local manufacturing industry.

PAYE Tax Band on salaries above KShs. 500,000

The Bill seeks to introduce a 35% income tax band for income above KES 500,000 per month effective 1st January 2024.

Mandatory National Housing Development Fund deductions under the Employment Act

The Bill proposes to introduce mandatory contributions by both the employer and employee to the National Housing Development Fund at a rate of 3% of the employees’ basic salary provided that the sum of the employer and employee contributions do not exceed five thousand shillings a month. 

The Bill further proposes that the contribution will be used to fund the purchase of a home for those who qualify for affordable housing scheme and for those not eligible may after seven years, or upon attaining retirement age whichever is earlier transfer the contributions to a pension scheme, their staff or dependent children or receive in cash. The cash will, however, be taxable.

This proposal is aimed at achieving the government’s commitment to access to affordable housing under the Big Four agenda. The imposition of a mandatory contribution is unlikely to go down well for most Kenyans especially in the current economic environment.

Exemption of exported services from VAT

In 2022, the Finance Act moved the services from exempt to standard rated. 

Exported services were subject to VAT at 16% while exported services with respect to Business Process Outsourcing (BPO) were subject to VAT at 0%. 

The prevailing VAT regime was considered controversial because charging VAT on exported services at 16% went against international best practice. 

On the other hand, the VAT Act did not define a BPO therefore creating a headache for clients on determining the appropriate VAT treatment for services rendered to entities outside Kenya. While the proposal provides clarity on the VAT treatment for exported services, including BPOs, any input VAT cost incurred by the entity exporting the services outside Kenya will become a cost. 

This will mean that the cost of doing business for such entities will increase, effectively making Kenya unattractive to investors in such service companies.

Increase of turnover tax (ToT) from 1% to 3%

The Bill seeks to change the bands for ToT from the current KES 1 million to KES 50 million to KES 500,000 to KES 15 million. In addition, the Bill proposes to increase the turnover tax rate from 1% to 3%

The proposals seek to expand the turnover tax base by targeting persons with turnover between KES 500,000 and KES 1 million who were previously exempt. Further, the Bill caps ToT to persons with turnover of KES 15 million down from the previous KES 50 million.

15% withholding tax on income earned by digital content creators.

The Bill proposes to introduce a definition of the term “digital content monetization” to mean offering for payment entertainment, social, literal, artistic, educational or any other material electronically through any medium or channel, in the following forms:

Website advertisement, social media platform, brand sponsorship, affiliate marketing, subscription services, merchandise sales, exclusive content membership programmes, licensing content including photograph, music, or user own projects and crowd funding for specific goals for content creators. 

The Bill further proposes to subject such income to Withholding Tax (WHT) at a rate of 15%

Increase in the VAT rate on petroleum products from 8% to 16%

Fuel products will now be at 16% and LPG exempt.

This will affect the economy adversely and will trigger a significant rise in the cost of living given that the country’s economy relies heavily on fuels, which are already highly priced globally.

The change in the VAT status of LPG from 8% to exempt will lead to a reduction in the cost of the same, making it more affordable to Kenyan households. 

The Finance Act 2022 had reduced VAT on LPG reduced from 16% to 8%

WHT on sales promotion, marketing, and advertising services

Marketing and advertisement services have remained out of the ambit of withholding tax due to lack of clarity in the law.

The Finance Bill seeks to introduce withholding tax on sales, promotion and advertisement paid to residents’ persons in excess of KES 24,000 per month at the rate of 5% of the gross amount.

Digital Assets Tax

The Finance Bill proposes to introduce a Digital Asset Tax that requires the owner of a platform or person facilitating the transfer of digit assets to deduct the tax at the rate of 3% of the gross fair market value, consideration received, or receivable at the point of exchange or transfer of the digital asset. Payment of the DAT is due within 24hrs after making the deduction.

Non-resident persons who own platforms on which digital assets are exchanged or transferred will be allowed to register under the simplified tax regime. The Finance bill 2023 provides an extensive definition of digital assets.

This provision seeks to capture digital assets such as cryptocurrencies which are gaining a lot of acceptance and growth in Kenya. The requirement to deduct and remit the tax within 24hrs will create an administrative burden on the operators of such platforms.