How new tax proposals offer relief to Kenyans

National Treasury Cabinet Secretary John Mbadi. [File, Standard]

Some key proposals by National Treasury Cabinet Secretary John Mbadi provide major relief for Kenyans in the Tax Laws (Amendment) Bill 2024.

This is seen as an effort by the Ruto government to assuage public anger over the high cost of living.

The proposed law seeks to reintroduce some of the revenue raising measures contained in the Finance Bill 2024, which President William Ruto dropped in the wake of protests led by Gen Zs.

The most significant is the introduction of Significant Economic Presence Tax, which shall be payable by a non-resident person whose income from the provision of services is derived from or accrues in Kenya through a business carried out over the digital marketplace.

The proposed amendment is intended to replace Digital Service Tax with Significant Economic Presence to provide for taxation at the effective rate of 6 per cent as opposed to 1.5 per cent under Digital Service Tax.

According to the new National Treasury CS John Mbadi  this will align the taxation of digital services with international best practice.

The Bill proposes to expand the definition of a digital marketplace to include ride-hailing services, food delivery services, freelance services and professional services, among others, which have become popular with Gen Zs in the wake of rising unemployment.

However, the Bill proposes to amend the Income Tax Act to provide for allowable deductions in the computation of taxable income of individuals; contributions to the Social Health Insurance Fund; the amount deducted in accordance with affordable housing and contributions to a post-retirement medical fund up to Sh15,000.

The National Treasury CS says the proposed amendments will boost disposable income and enhance the employees’ take-home pay. 

The Bill also proposes to repeal the Affordable Housing Relief in view of the same being made an allowable deduction.

Additionally, the Bill, if enacted, will amend the First Schedule to the Income Tax to exempt pension payments including gratuity and other payments from a registered pension fund, registered provident fund, public pension scheme or National Social Security Fund from income tax and further remove the exemption of the income of the National Housing Development Fund.

“The exemption from tax is intended to also apply to withdrawals from the funds prior to attaining retirement age due to ill health or after attaining twenty years from the date of registration as a member of the fund. It also proposes to review paragraph 60 so as to introduce taxation of interest income from infrastructure bonds at the rate of 5 per cent,” Mbadi said in a bulletin. 

This will apply to the bonds that will be issued from the date the provision becomes operational.

“This proposal seems to be in response to concerns relating to the negative impact that contributions to both the Social Health Insurance Fund and the Affordable Housing Levy have had on the net earnings of employees. To this end, the proposal will allow such contributions to be deducted before arriving at the taxable income of an employee.

“This will lead to a reduction in the pay as you earn (PAYE) payable by employees and therefore ultimately lead to an increase in the net pay of employees. This was one of the proposals that was contained in the Finance Bill 2024,” Bowmans, a South African-based legal advisory firm, says in its analysis of the Bill.

It adds that the proposal to exempt from income tax the payment of pension benefits to a person upon attainment of the retirement age will encourage saving for retirement through a registered scheme and prevent early withdrawals due to the conditions for the exemption such as the requirement for withdrawal after 20 years from the date of registration as a member of the fund.

Additionally,  non-resident contractors, sub-contractors, consultants or employees involved in the implementation of a project financed through 100 per cent grant will be exempted from income tax.

The Bill further seeks to amend section 5 of the Income Tax Act to enhance benefits by employers to employees not subject to tax.

This proposal is intended to enhance the benefits of meals (from Sh48,000 to Sh60,000), non-cash (from Sh36,000 to Sh60,000) and gratuity and similar payments that are exempt from tax (from Sh240,000 to Sh360,000). 

“This proposal seeks to increase the limits that have remained unchanged for close to nineteen (19) years despite the increase in the cost of living and increase in income levels. In addition, this is one of the positive proposals that were not enacted due to the withdrawal of the Finance Bill 2024,” according to Bowmans.

In another relief to consumers, the Bill has also proposed to reclassify all inputs and raw materials for manufacturers of agricultural pest control products; agricultural pest control products; fertilisers  and inputs or raw materials for manufacturers of fertiliser.