The Budget Statement for the FY 2019/20 was read on 13 June 2019 by the Cabinet Secretary for the National Treasury, Hon. Henry Rotich (the CS). The theme for this year's Budget Statement is: Creating Jobs, Transforming Lives – Harnessing the "Big Four" Plan.
At this stage, we have not yet seen the Finance Bill 2019 which will set out the statutory provisions that are proposed to be amended. The Finance Bill 2019 will also stipulate the effective date when the provisions discussed below should take effect.
We will, therefore, provide an updated bulletin once the Finance Bill 2019 has been published by the Government Printer and has been issued to the public.
For now, we set out below the key highlights from the Budget Statement:
1. Income Tax
This year the CS introduced very minimal changes to the Income Tax Act on the basis that the Income Tax Bill, 2018 is in the advanced stages of legal drafting and is expected to be tabled before Parliament by mid-July 2019.
a. Capital Gains Tax (CGT): In order to align Kenya's CGT rate with its EAC counterparts, the CS has proposed an increase in the CGT rate from 5% to 12.5%. There was no indication whether an indexation or tapering system to take into account the impact of inflation will be introduced. This will be confirmed once the Finance Bill, 2019 is issued to the public.
b. CGT exemption: The CS has proposed to extend the CGT exemption currently existing in the Eighth Schedule to the Income Tax Act, to gains made from the transfer of property in internal corporate restructuring transactions, provided there are no third parties involved. The A&K Tax Team has consistently lobbied the National Assembly and the National Treasury for a CGT exemption on internal corporate restructuring and therefore the introduction of this exemption is a very welcome move.
c. Lower corporate tax: The CS has proposed to lower the corporation tax rate for plastic recycling companies from the usual 30% to 15% for the first five years of operation.
d. Withholding tax: The CS has proposed to include the following services as part of professional services for purposes of withholding tax:
- security services;
- cleaning and fumigation;
- catering services offered outside hotel premises;
- transportation of goods excluding air transport services; and
- sales, promotion, marketing and advertising.
e. Electricity allowance: In 2019, the Income Tax Act was amended to introduce a 30% tax deduction on electricity cost incurred by manufacturers in their operations subject to conditions that were to be set by Ministry of Energy. The CS has indicated that the framework for claiming the 30% tax deduction is now in place and the manufacturers can now utilise this incentive.
2.Value Added Tax (VAT)
a. The scope of goods which are exempt from VAT has been increased to include:
- locally manufactured motherboards and inputs used in the manufacture of computers;
- services offered to plastic recycling plants as well as the supply of machinery and equipment used in the construction of these plants.
b. VAT refunds:
- The VAT Refund Formula is to be revised to allow for easier recovery of input tax related to zero-rated supplies.
- National Treasury will set up a team to validate outstanding VAT refunds within the next 2 months.
- Withholding VAT is proposed to be reduced from 6% to 2% in order to reduce the accumulation of WHVAT credits.
3. Customs Duty
a. Import duty rate changes
- iron and steel products have been maintained at the ad valorem rate of 25%.
- paper and paper board products maintained at 25% for 1 more year.
- raw timber reduced from 10% to 0%.
- retention of ad valorem rate of import duty of 25% on finished timber products.
b. General industry changes
- Vetting and gazettement of imports and export consolidators.
- Streamlining procedures and logistics at the Mombasa port and at the Inland Container Depot.
- Streamlining of the rollout of the integrated customs management system, regional electronic tracking to detect cargo diversion.
4. Excise Duty
- Excise duty at the rate of 10% on the amount staked in betting activities.
- Reduction of excise duty from 25% to 10% on motor vehicles fully powered by electricity.
- Increase in excise duty on cigarettes, wines and spirits by 15%.
5. Tax Procedures Act, 2015 (TPA)
- It is proposed that Amnesty on tax penalties and interest be granted for entities seeking to list on the Growth and Enterprise Market Segment (GEMS) in respect of any outstanding tax for 2 years prior to the listing. However, principal taxes shall be payable in full.
- Exemption from KRA's PIN requirement on opening a bank account for foreigners, privileged persons and foreign investors upon application to the Commissioner.
6. Miscellaneous Fees and Levies Act, 2016 (MFLA)
- Refund of anti-adulteration levy paid by manufacturers of paint and resin on illuminating kerosene.
- Import Declaration Fees (IDF):
- reduced from 2% to 1.5% on intermediate goods and raw materials; and
- increased from 2% to 3.5% for finished goods
- An export levy of 10% introduced on tanned and crust hides and skins.
7. Other Proposals
a. Banking Act (Cap 488)
- Proposed repeal of section 33B of the Banking Act (interest rate capping) to enhance access to credit and minimize the adverse impact of the cap on the interest rate. This has been necessitated by different market surveys by the Central Bank of Kenya and the World Bank Group showing that the unintended consequence of the rate capping was that SMEs and riskier individuals were excluded from the formal borrowing market. This further had the effect of ballooning the unregulated lending industry.
b. Insurance Act (Cap 487) and Insurance (Policy Holder's Compensation Fund) Regulations, 2010 (the Regulations)
- The Policy Holder's Compensation Fund was set up to cushion holders of insurance policies in the event that insurance companies become insolvent. There is a proposal, however, to introduce amendments to the Insurance Act and the Regulations to bring clarity and enable the Fund to be utilised to compensate claimants presumably also in the case of statutory management.
c. the Insurance (Motor Vehicle Third Party Risks) (Certificate of Insurance) Rules (the Rules)
- There is a proposal to amend the Rules to require all passenger-carrying ''boda bodas'' and ''tuk-tuks'' to have an insurance cover for passengers and pedestrians.
8. Other Changes
There are a number of additional changes and clarifications which we expect will be reflected in the Finance Bill, 2019 including the following:
a. various changes to the Real Estate Investment Trusts (REITs) regime;
b. clarification on whether the new compensating tax provisions apply to dividends arising from exempt income;
c. proposals on taxation of the Digital Economy which has been an area of focus by the Government and most economies globally;
d. clarity on what constitutes an export of services for VAT purposes; and
e. further tax incentives to enhance the attractiveness of the Government's affordable housing scheme.
Our detailed client alert will follow once we have received and reviewed the Finance Bill, 2019 which we expect to be published soon.
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