HIGHLIGHTS OF THE KENYA BUDGET STATEMENT 2018/2019

Thursday, June 14, 2018
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The Cabinet Secretary for National Treasury and Planning, Hon. Henry Rotich (theCS) presented the Budget Statement for the fiscal year 2018/2019 to Parliament on 14 June 2018, unveiling a record KES 3.07 trillion spending plan. The theme for this year’s budget is “Creating Jobs, Transforming Lives for Shared Prosperity”.

As expected, the 2018/2019 budget focuses on the Government’s Big Four Agenda, whose key pillars are manufacturing, universal healthcare, food security and affordable housing. The CS noted the underperformance of the economy last year which grew at a rate of 4.9%, falling below the 5.6% average growth rate achieved over the last 5 years. The drought suffered by the country and the lengthy electioneering period in 2017 were cited among the factors attributed to the adverse impact.

The tax measures proposed in the Budget Statement mainly affect indirect taxes, probably because the Income Tax Act is set for an overhaul through the Income Tax Bill 2018, which is expected to be tabled Parliament in July. The CS pointed out that the measures to be introduced via the Finance Bill 2018 are expected to raise additional revenue of KES 27.5 billion in the year 2018/2019. 

There was little focus on value added tax (VAT), possibly because VAT amendments are substantially addressed by the Tax Laws (Amendment) Bill 2018.

We highlight below some key issues addressed in the Budget Statement. Please note that the comments highlighted in this newsflash represent our preliminary views on the budget statement. We shall issue a more comprehensive newsflash once we have reviewed the Finance Bill 2018 and Finance Act 2018 to be published at a later date, which may include items not reflected in the Budget Statement. 

Proposed Tax Measures

Proposed Amendments

Comment             

 Income Tax

Removal of proposed new tax bracket: the proposal in the Income Tax Bill 2018 to introduce a new tax rate of 35% bracket for persons with a monthly income of KES 750,000 or more has been revoked.

Capital gains: the proposal in the income Tax Bill to increase the rate of capital gains tax (CGT) from 5% to 20% has been revoked.

This is in response to comments from the public participation process that took place in May for the Income Tax Bill. It is not surprising that the proposals were opposed by the public and parliament.

Replacing the provisions of the Income Tax Act with respect to turnover tax with a presumptive tax imposed upon acquisition of a business permit or trading licence at the rate of 15% of business permit fee.

This will effectively tax persons operating in the informal economy.

A withholding tax of 20% on demurrage payments to non-residents.

This places an obligation for persons in the logistics industry to account for withholding tax on demurrage payments.

An introduction of 5% CGT on transfer of property by general insurance companies.

This proposal is not very clear since all transfers of property are subject to 5% CGT. We await the Finance Bill to confirm the specific tax measures.

A 5% withholding tax on insurance premiums paid to non-resident insurers excluding payments for aircraft insurance.

This is in response to the growth of the business of general insurance. The CS seeks to tax some of the income streams in general insurance which include premiums.

A 30% expense deduction in addition to normal expense deductions on taxable income for expenditure incurred on electricity bills by manufacturers.

Further update on the application of this provision to be provided pursuant to the Finance Bill 2018.

Value Added Tax

Grain storage facilities: proposal to exempt equipment to be used in the construction of grain storage facilities to support safe storage of food.

This exemption expands the current exemption under paragraph 93 of the First Schedule of the VAT Act which applies to materials for the construction of grain storage facilities.

Animal feeds: proposal to exempt raw materials for production of animal feeds.

The rationale is to make animal feeds affordable to farmers and attract investors in the sector. By exempting the raw materials from VAT, the cost of production is likely to be lowered and this could result in lower retail prices.

Laptops: proposal to exempt parts imported or purchased locally for the assembly of computers.

The rationale is to encourage local manufacture of laptops, innovation and job creation. 

This is likely to bring down the cost of production of laptops locally and thus the retail prices of locally assembled laptops.

Excise Duty

Proposal to increase the rate of excise duty for imported private passenger motor vehicles (above 2,500 cc diesel engine capacity and above 3,000 cc petrol engine capacity) from 20% to 30%.

This will result in higher import taxes for higher capacity private motor vehicles.

Introduction of excise duty at the rate of 0.05% on any transfer of amounts of KES 500,000 or more through banks/financial institutions.

Proposal to increase excise duty on fees charged for money transfer services by cellular phone service providers from 10% to 12%.

This proposes to introduce a ‘robin hood tax’ to generate revenue to fund the government’s Big Four Agenda.

The increase in excise duty will increase the costs of cellular money transfer services which will impact on the common mwananchi.

Proposal to provide a single excise duty rate for both illuminating kerosene and gas oil of KES 10,305 per 1,000 litres. Currently illuminating kerosene attracts a duty rate of KES 7,205 per 1,000 litres while gas oil is subject to excise duty at the rate of KES 10,305 per 1,000 litres.

By providing a uniform exercise duty rate for both types of fuels, the Government hopes to curtail fuel adulteration.

Customs

The East African Community Custom Management Act, 2004 and the EAC Common External Tariff (CET) are undergoing extensive review, aimed at promoting industrialization, encouraging local manufacturing and investments and creating incentives in the agricultural and manufacturing sectors. Some of the proposed changes include:

(a) iron/steel industry: to increase import duty from the current 25% to 35% on iron and steel products imported into the region;

(b) paper and paper products industry: to increase import duty from the current 25% to 35% on paper and paper board imported into the region; 

(c) textile and footwear industry: to introduce a specific rate of import duty of USD 5 per unit or 35% whichever is higher, on raw materials imported into the region;

(d) vegetable oils sector: to introduce a specific rate of USD 500/MT or 35% whichever is higher on imported vegetable oils;

(e) pesticides: full (100%) remission on import duty on the importation on inputs and raw materials for the manufacture of pesticides and acaricides pursuant to the EAC Duty Remission Scheme; 

(f) tourism sector: full (100%) remission on import duty on the importation of motor cars, sightseeing buses and overland trucks imported by licensed tour operators under the EAC Duty Remission Scheme; and

(g) clean energy: to provide 100% remission of duty on taxable inputs and raw materials for assembly of clean energy cooking stoves imported by local manufacturers.

The rationale is to protect local manufacturers and industries from competition from cheap and subsidized imports, encourage local production and create jobs for the youth in the EAC region.

Tax Procedures Act

Late payment interest increased from 1% of principal tax due to 2%.

Late payment penalty for late payment of tax has been set at 20% of the tax due.

This change is also proposed to the Betting, Lotteries and Gaming Act on late payments of taxes by entities subject to that Act.

This proposal is made in response to taxpayers filing returns without paying the taxes due on time.

Export Levy

Imposition of a 20% export levy on the export of copper waste and scrap metal.

This is intended to deter exports of copper waste and scrap metal to avoid vandalism.

Extension of the tax amnesty deadline
The CS noted that the uptake of the tax amnesty has been low, and in light of this has proposed an amendment to the Tax Procedures Act to extend the deadline for making declarations under the amnesty from 30 June 2018 to 30 June 2019. It is also proposed that the income in respect of which the amnesty applies be income for the period ending 31 December 2017 instead of 31 December 2016. The CS clarified that funds brought into the country through the amnesty will be exempt from the provisions of the Proceeds of Crime and Anti-Money Laundering Act. However, this shall not apply to funds acquired through terrorism, poaching and drug trafficking.

Other Reforms
In addition to the above tax measures, the CS has proposed key changes to the following laws:

  • amendment of the Banking Act to repeal section 33B of the Banking Act to remove the interest rate cap for lending by banks and financial institutions;
  • introduction of a Financial Market Conduct Bill to deal with inadequacies in consumer protection and unregulated lending in the financial sector; and
  • amendment of the Employment Act to provide that an employer shall contribute to the National Housing Development Fund, in respect of each of their employees, 0.5% of the employee’s gross monthly emolument subject to a maximum of KES 5,000 while the employee will contribute 0.5% of their monthly gross earnings.

The full Budget Statement may be accessed here. We will keep you updated on developments and issue a comprehensive analysis of the Finance Bill 2018.

For further assistance please contact Alex Mathini, Partner Corporate Commercial and Head of Tax, the Bowmans Kenya Tax Team or your relationship partner at Bowmans Kenya.