The Finance Act 2023 was enacted on the 30th of June 2023. It is important to note that presently, the Act has been suspended by the High Court pending a determination of a suit challenging it.
We analyse below the key changes and impact of the Finance Act 2023:
In a bid to increase the tax base and collection of Income Tax, the Income Tax Act (Cap 470) has been amended to provide as follows, inter alia:
Increased income tax for resident individuals
The Finance Act 2023 revised the taxable income tax bands as follows:
New Tax Rate
Previous Tax Rate
On the first 288,000 per annum (p.a) (KES 24,000 per month)
Between KES 288,001 – 388,000 p.a (KES 24,001- 32,333 per month)
Between KES 388,001 - 5,999,999 p.a (KES 32,334 - 499,999 per month)
Between KES 6 million - 9.6 million p.a (KES 500,000 - 800,000 per month)
All income above KES 9.6 million p.a (KES 800,001 per month)
The changes appear to introduce the principle of progressive where those with higher income attract a higher tax rate. Whilst this would increase collection of PAYE, this would not be significant as the number of people with higher income is not similarly significant.
New tax regime for foreign companies
Effective 1st January 2024, the tax rate on the taxable income attributable to local branch – what is referred by the Companies Act as Registered Foreign Company (and other permanent establishments) of non-resident companies from 37.5% to 30%.
Further, a 15% tax rate on repatriated income on the income sent back by the local branches and other permanent establishments owned by the foreign companies has been introduced. Repatriated income shall be equal to the net assets at the beginning of the year and adjusted by the profit before the tax for the year.
New tax rate and thresholds for turnover tax
The Finance Act 2023 also extended the applicability of turnover tax to incorporate small and medium enterprises. The turnover tax rate will increase from 1% to 3% of gross receipts. Additionally, turnover tax will apply to businesses whose turnover is between KES 1 million and 25 million; the capping has been reduced from KES 50 million to widen the pool of collection.
Effectively, businesses with a turnover in excess of KES 25 million must be subject to regular income tax of 30% on taxable profits whilst those with turnover of below KES 25 million may elect to be subject to the simplified turnover tax regime which operates as a final tax on income. The effective date for this change is 1st July 2023.
Reduction in the tax rate for residential rental income tax
The residential income tax rate has been reduced from 10% to 7.5% on the gross of rent payable.
Digital asset tax
Effective 1st September 2023, a digital tax on any income from the transfer or exchange of digital assets has been introduced. Digital assets are defined as anything of value that is not tangible such as cryptocurrencies, non-fungible tokens, token codes and any digital representation of value that can be exchanged, stored or transferred electronically.
The tax rate has been set at 3% of the transfer or exchange value of the asset and is deductible from the recipient of the income by the owner of any platform facilitating the exchange. Non-resident owners of platforms will now be required to register for tax in Kenya.
Withholding tax on digital content
Further to the digital tax, both resident and non-resident digital content creators whose income is deemed to have accrued from Kenya must now pay withholding tax on their income. The WHT rate for resident digital content creators shall be 5% and 20% for non-resident. Digital content has been defined as any entertainment, social, liberal, artistic, educational or any other material electronically offered for payment through any medium or channel.
Thin capitalization and foreign exchange losses
Thin capitalization refers to a situation where a company is financed through a relatively high level of debt compared to equity which would impact on its (reported) profit for tax purposes. The new changes now provide that entities which have a total gross interest paid or payable to related persons and third parties, whether resident or nonresident, in excess of 30% of the earnings before interest, taxes, depreciation and amortization (EBITDA) in any financial year are deemed to be thinly capitalized. Such thinly capitalized entities are subject to a limitation on the amount of interest they can deduct in computing their annual income tax. Therefore, only 30% of their interest expense can deducted in computing tax. Notably, interest on loans from local commercial banks is restricted from deduction.
New withholding taxes (WHT)
Effective 1st July 2023, WHT will now be applicable on payment for sales promotion, marketing and advertising services at the rate of 5% and on digital content monetisation at the rate of 5% for payments made to resident creatives and 20% for payments for non-resident creatives.
Also, there is an obligation to remit WHT deducted within 5 working days after making the deduction and also to file the appropriate return within 5 working days.
Capital allowances and investment deductions
Effective 1st January 2024, industrial buildings which are defined to include buildings in use for transport, bridges, tunnels, inland navigation water and electricity or hydraulic power undertaking, shall enjoy a capital allowance at the rate 10%. This incentive is aimed at promoting investment in transport sector infrastructure. Also, a capital allowance shall be enjoyed on capital expenditure for civil works at the rate of 10% on earthworks for telecommunication equipment and construction in connection with the installation and maintenance of telecommunication equipment.
Value Added Tax (VAT)
The following are the notable impacts/changes in the Finance Act 2023 in relation to the VAT regime:
VAT on exported services
The export of services shall now be zero-rated for VAT purposes effective 1st July 2023.
VAT on petroleum products
Controversially, VAT on petroleum products has been increased from 8% to 16%. This will no doubt increase the cost of doing business and cost of living in Kenya.
In a welcome development however, Liquefied Petroleum Gas (LPG) has been exempted from VAT and bio-ethanol vapour stoves have been zero-rated.
Registration for VAT on the supply of imported digital service
An importer of digital service over the internet, an electronic network or through a digital marketplace is not required to register for VAT whether or not they meet the turnover threshold of KES 5 million.
New exemptions to VAT
The following, which were previously charged VAT at the rate of 16%, have now been exempted from VAT:
taxable goods used in constructing and equipping specialized hospitals of at least 100-bed capacity (subject to ministerial approval);
tea sold for the purpose of value addition before exportation (Subject to KRA approval);
inbound international sea freight offered by a registered person;
taxable supplies made to or by a school feeding programme recognized by the Cabinet Secretary responsible for matter relating to education.
The following, which were previously zero-rated for VAT purposes, have now been exempted from VAT:
agricultural pest control products as well as inputs and raw materials supplied to manufacturers of agricultural pest control products (subject to ministerial approval);
fertilizers as well as inputs and raw material supplied to manufacturers of fertilizers (subject to ministerial approval);
transportation of sugarcane from farms to milling factories.
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