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The Finance Bill Kenya 2023: What You Need to Know

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Learn about the Finance Bill Kenya 2023, its key tax proposals, their impact, and challenges

The Finance Bill Kenya 2023 is a bill that proposes various tax changes and amendments to the existing tax laws in Kenya.

It was tabled in Parliament on 4 May 2023 and is expected to be passed into law by 30 June 2023.

The bill aims to expand the tax base, raise revenues, support priority sectors, ease the cost of living and promote inclusive growth.

The bill has significant implications for the economy and the taxpayers, as it introduces new taxes, increases existing taxes, exempts some services from taxes, and provides incentives for certain sectors.

In this article, we will provide an overview of the key tax proposals in the bill, analyze their rationale, benefits, and challenges.

The Finance Bill Kenya 2023 Tax Proposals

The bill has many tax proposals that will affect different sectors and groups of people.

Some of them include:

  • Export and investment promotion levy
  • Income tax rate for high earners
  • Exemption of exported services from VAT
  • Turnover tax for small businesses
  • Contribution for affordable housing
  • Withholding tax for digital content creators
  • VAT rate for petroleum products

Export and investment promotion levy

The bill proposes the introduction of a 1.5% levy on specific imported goods, including motor vehicles, electronics, furniture, clothing, and shoes.

The Kenya Revenue Authority (KRA) will be responsible for collecting the levy at the point of entry.

However, the levy will not be applicable to goods imported for industrial use or export processing zones.

Furthermore, goods exempt from import duty under the East African Community Customs Management Act will also be exempt from this levy.

The primary objective behind this proposal is to promote local production and generate employment opportunities in the manufacturing sector.

The government aims to stimulate the demand for domestically produced goods and reduce the trade deficit by increasing the cost of imported goods.

Additionally, the government expects to generate approximately Kshs. 12 billion in additional revenue annually through this levy.

Nevertheless, this proposal presents certain challenges and drawbacks.

Firstly, it may lead to an increased cost of living for consumers relying on imported goods for their basic necessities.

Secondly, it could negatively impact businesses reliant on imported inputs or machinery for their operations.

Thirdly, there is a possibility of contravening regional and international trade agreements to which Kenya is a signatory, such as the African Continental Free Trade Area (AfCFTA) and the World Trade Organization (WTO).

Lastly, the proposal may fail to achieve its intended objective of boosting local production if there are other factors impeding the competitiveness of local industries.

These include high electricity costs, inadequate infrastructure, a scarcity of skilled labor, and limited access to credit.

Income tax rate for high earners

The bill proposes an increase in the income tax rate for individuals earning over Kshs. 500,000 per month, raising it from 30% to 35%.

Approximately 0.1% of all taxpayers in Kenya will be affected by this change, contributing around 40% of the total income tax revenue.

Additionally, the bill recommends adjustments to income tax bands and personal relief to account for inflation.

The primary aim of this proposal is to establish a fairer and more progressive tax system.

The government argues that individuals with higher incomes should contribute more in taxes since they benefit more from public services and infrastructure.

It also anticipates that this change will generate approximately Kshs. 8 billion in additional revenue per year.

However, there are several challenges and drawbacks associated with this proposal.

Firstly, it might discourage investment and innovation by reducing incentives for entrepreneurship and risk-taking.

Secondly, it could decrease the disposable income and purchasing power of high-income earners, potentially impacting their consumption and savings habits.

Thirdly, it may create opportunities for tax avoidance and evasion, as it could lead to income shifting and under-reporting.

Lastly, if other factors such as corruption, weak governance, inadequate institutions, and lack of social protection contribute to widening the income gap, this proposal may not achieve its intended goal of enhancing equity and redistribution.

Exemption of exported services from VAT

The bill suggests an exemption from value-added tax (VAT) for services exported from Kenya.

This proposal would reverse the amendment introduced in the Finance Act 2020, which imposed a 16% VAT rate on exported services.

According to the bill, exported services are defined as services consumed or used outside Kenya.

The main purpose of this proposal is to enhance the export sector’s growth and improve Kenya’s competitiveness in the global market.

The government argues that exempting exported services from VAT would reduce production costs and increase profitability for service providers.

Additionally, the government expects this measure to boost foreign exchange earnings and create more employment opportunities in the service sector.

However, this proposal also presents challenges and drawbacks.

Firstly, it may result in a reduction of tax revenue by approximately Kshs. 10 billion per year, which could impact the budget deficit and fiscal stability.

Secondly, it may create opportunities for tax evasion, as some service providers might falsely claim exemption for services that are not genuinely exported or consumed outside Kenya.

Thirdly, achieving the intended objective of boosting the export sector may be challenging if other factors, such as a lack of innovation, skills, and infrastructure, hinder the competitiveness and quality of services.

Turnover tax for small businesses

The bill proposes an exemption from value-added tax (VAT) for services exported from Kenya, effectively reversing the amendment made in the Finance Act 2020 that subjected exported services to a standard VAT rate of 16%.

Exported services, as defined in the bill, are those consumed or utilized outside Kenya.

The main objective of this proposal is to bolster the export sector and enhance Kenya’s competitiveness in the global market.

The government argues that exempting exported services from VAT will lower production costs and increase profitability for service providers.

Additionally, the government anticipates that this measure will boost foreign exchange earnings and create more employment opportunities within the service sector.

However, this proposal does present certain challenges and drawbacks.

Firstly, it may result in a reduction of tax revenue by approximately Kshs. 10 billion per year, which could impact the budget deficit and fiscal stability.

Secondly, it may create loopholes for tax evasion, as some service providers might falsely claim exemptions for services that are not actually exported or consumed outside Kenya.

Thirdly, achieving the intended objective of boosting the export sector may prove challenging if other factors, such as a lack of innovation, skills, and infrastructure, hamper the competitiveness and quality of services.

Contribution for affordable housing

The bill proposes a 3% monthly contribution from both employees and employers towards a fund dedicated to financing affordable housing projects.

The contribution will be capped at Kshs. 5,000 per month for each party, and the employer will deduct and remit the contribution to the National Housing Development Fund (NHDF).

Employees who contribute to the fund will be eligible to apply for affordable housing units under the government’s Big Four Agenda.

The primary aim of this proposal is to address the housing needs of low and middle-income earners by providing them with decent and affordable housing options.

The government highlights the current housing deficit of approximately 2 million units in Kenya and the growing demand for housing that outpaces the supply.

Additionally, the government expects this initiative to create more employment opportunities in the construction sector and stimulate economic growth.

However, there are challenges and drawbacks associated with this proposal.

Firstly, it may reduce the take-home pay for workers, impacting their livelihoods and welfare.

Secondly, it could increase the cost of doing business for employers, affecting their competitiveness and profitability.

Thirdly, legal and constitutional challenges may arise as the proposal potentially infringes on the right to property and the principle of consent.

Lastly, it may not effectively achieve its goal of providing affordable housing if other factors hinder the implementation and delivery of housing projects, such as corruption, mismanagement, bureaucracy, and land-related issues.

Withholding tax for digital content creators

The bill introduces a 15% withholding tax on income earned by digital content creators, including bloggers, vloggers, podcasters, and online influencers.

This withholding tax will be deducted and remitted by digital service providers like YouTube, Facebook, Instagram, and TikTok to the Kenya Revenue Authority (KRA).

Digital content creators will be required to register with the KRA and file annual tax returns.

The primary rationale behind this proposal is to bring the digital economy into the tax system and acknowledge its contribution to the country’s GDP.

The government asserts that the digital content creation industry is experiencing rapid growth and generating significant income for many Kenyans.

Furthermore, the government anticipates that this proposal will generate approximately Kshs. 2 billion in additional revenue per year.

However, there are several challenges and drawbacks associated with this proposal.

Firstly, it may dampen creativity and innovation by diminishing the incentives and rewards for digital content creation.

Secondly, it could reduce the disposable income and purchasing power of digital content creators, potentially affecting their consumption and savings patterns.

Thirdly, it may create opportunities for tax avoidance and evasion, as it could lead to income shifting and under-reporting.

Lastly, it may not effectively achieve its objective of taxing the digital economy if there are other factors that impede the identification and valuation of digital services, such as insufficient data, lack of regulation, and limited cooperation.

Therefore, we recommend that the government reconsider this proposal and instead focus on supporting and facilitating the growth and development of the digital content creation industry.

Additionally, adopting a differentiated and flexible approach to taxing digital services based on their nature, source, and value would be advisable.

VAT rate for petroleum products

The bill suggests raising the value-added tax (VAT) rate for petroleum products, such as petrol, diesel, kerosene, and liquefied petroleum gas (LPG), from 8% to 16%.

Additionally, it proposes eliminating the VAT exemption for electric accumulators and separators used in electric vehicles.

The primary rationale behind this proposal is to bring the VAT rate for petroleum products in line with the standard rate and reduce fuel subsidies.

The government argues that the current VAT rate for petroleum products is lower than the regional and international average, primarily benefiting high-income earners.

Furthermore, the government anticipates that this measure will generate approximately Kshs. 40 billion in additional annual revenue.

However, there are several challenges and drawbacks associated with this proposal.

Firstly, it may raise transportation and energy costs for both consumers and businesses.

Secondly, it could have a ripple effect on the prices of other goods and services that rely on fuel, such as food, electricity, and water.

Thirdly, it may contribute to inflation and hinder economic growth.

Lastly, it may not effectively achieve its intended objective of reducing fuel subsidies if other factors, including exchange rate fluctuations, global oil prices, and county government taxation, influence fuel pricing and supply.

Conclusion

The Finance Bill Kenya 2023 introduces significant changes to tax laws in Kenya, impacting the economy and taxpayers.

It encompasses new taxes, higher tax rates, tax exemptions, and sector-specific incentives.

The bill aims to broaden the tax base, increase revenue, support priority sectors, mitigate living costs, and foster inclusive growth.

However, the bill also presents challenges and drawbacks.

It may elevate the tax burden, discourage investment and innovation, promote tax avoidance and evasion, violate trade agreements, and face legal and constitutional obstacles.

The bill’s intended objectives may not be fully realized if impediments hinder the implementation of tax measures and public services.

I hope that this article has provided you with useful information and insights on the Finance Bill Kenya 2023.

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About the author

Zowan Fayzan

Zowan Fayzan is a seasoned blogger specializing in news, entertainment, and celebrity biographies. With an informative and engaging writing style, he offers readers an inside look at the lives of the rich and famous.

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