Treasury scraps special VAT, company tax rates in revenue push
The National Treasury Building in Nairobi. Treasury has scrapped preferential tax rates for companies and introduced a withholding tax on dividends, royalties, and interest payments.
The Treasury has scrapped preferential rates on value-added-tax (VAT) and company tax in a radical shift aimed at curbing revenue losses.
A newly published National Tax Policy (NTP) said VAT will be charged at a uniform rate unlike currently where petroleum products attract a charge of 8 percent, other goods, and services 16 percent, and zero percent for exported goods.
“There shall be a single general rate of VAT. No exemption or lower-than—standard rates shall be provided under VAT on distributional consideration” the policy said.
The Finance Bill 2023 has already proposed to reinstate a 16 percent VAT charge on petroleum while —setting the stage for sharp rises in the cost of the commodity that affects all sectors of the economy.
The Finance Bill has however proposed to exempt liquefied petroleum gas(LPG) from Import Declaration Fees (IDF), and Railway Development Levy (RDL). LPG is currently subjected to taxes at the rate of 8 percent VAT.
The NTP said VAT shall be charged on all goods and taxable services in the country of destination or consumption, not the country of origin or production.
“The criterion for determining whether a business firm or other entity is liable to VAT will be VAT registration threshold which will be determined on the basis of cost-benefit of collecting VAT from small firms or entities,” the policy said.
In another key change, the Treasury has scrapped preferential tax rates for companies and introduced a withholding tax on payment for some services and income such as dividends, royalties, and interest payment as it tightened the noose of tax evasion.
The new NTP said there will only be a single corporate tax rate and no preferential tax rate shall be granted except in special instances where a venture directly supported specific government policy objectives.
“There shall be a single corporate tax rate. No preferential tax rate shall be granted. If a referential rate is granted for specific government policy objectives, the tax rate shall not be lower than that 50 percent of the general rate of corporation tax” the policy reads in part.
Presently, resident companies, corporations, and trusts pay a 30 percent tax on their profits through quarterly installments, while the rate for foreign firms with operations in Kenya is 37.5 percent.
In a shift, the Treasury said the tax rate will be uniform and that the tax base for corporate income levy shall include all revenue sourced from Kenya on an accrual basis regardless of whether derived from business or another activity.
“In the computation of taxable income from a business, deduction shall be allowed in respect of any expenditure incurred wholly and exclusively for the purposes of generating income. The capital deductions allowable shall not exceed 100 percent of the actual cost of the investment or the asset” the Treasury said.
According to the new tax policy, repatriated profits for non-residents operating in Kenya through permanent establishment shall be subjected to a tax rate equivalent to that charged to dividends paid to non-residents.
Damning data released by the Kenya Revenue Authority(KRA) last August showed that only 84,428 out of the 759,164 firms registered for corporation tax paid their dues in the year to June 2022-- pointing to possible avoidance by most of the companies.
This indicated that many companies may have reported losses as a tax avoidance strategy—a loophole that the State had attempted to address through the introduction of a minimum tax on corporate sales but was declared unconstitutional by the High Court.
It could also mean that many firms remained dormant with no income to declare with KRA data showing that an estimated 66.39 percent of tax registered companies filed returns by June last year, but only 16.75 percent of them paid taxes.
Meanwhile, the Treasury said personal income tax bands will be reviewed every five years to cater to inflation as the Treasury moved to maximise revenue collection.
The new NTP said aggregate income shall be taxed based on a progressive structure which means higher tax rates for those with higher income or more wealth so that those who earn or have more are taxed at a higher rate.
The Finance Bill 2023 has already proposed to raise the tax charge on those earning at least Sh500,000 monthly to 35 percent from 30 percent.
