On 4th December 2020, the Cabinet Secretary of National Treasury and Planning released a press statement notifying the public that the lowered rates of corporate, individual income and value added tax will return to the pre-COVID19 rates with effect from 1st January 2021 to enable implementation of the government’s budget.
Subsequently, the National Treasury has published the Tax Laws (Amendment) (No.2) Bill 2020 (“the Bill”) which proposes to amend the Income Tax Act, chapter 470 laws of Kenya and the Value Added Tax Act number 35 of 2013.
The Bill proposes to:
a) amend the Third Schedule to the Income Tax Act in relation to corporate and individual income tax;
Following the spread and effects of the COVID19 pandemic, Parliament enacted the Tax Laws (Amendment) Act, 2020 which,
- reduced the top tax rate on individual income tax (also known as Pay As You Earn) from 30% to 25% as a short-term measure to cushion employees;
- reduced corporate tax rate from 30% to 25%;
- increased the tax-free income to KES 24,000.00 to protect low income earners; and
- increased the annual tax relief for all employees from KES 16,896.00 to KES 28,800.00.
The Bill now proposes to revert the tax rates on item (i) and (ii) to their original rate with effect from 1st January 2021.
The Bill is silent on the items (iii) and (iv) however, the abovementioned press release noted that the government will continue to cushion low income earners earning KES 24,000.00 and below.
b) amend the Value Added Tax Act to insert a new clause at section 17(8) ; and
The First Schedule of the VAT Act exempts goods imported or purchased for the implementation of official aid-funded projects upon approval by the Cabinet Secretary for National Treasury from VAT.
The Bill proposes a new provision (section 17 (8)) allowing manufacturers, in relation to taxable supplies made to an official aid-funded project, to deduct their input VAT from their output VAT as may be approved by the Cabinet Secretary.
c) provide clarification on section 12D of the Income Tax Act
The Finance Act, number 8 of 2020 amended the Income Tax Act by inserting a new section 12D.
Section 12D introduced a Minimum Tax which will be payable at the rate of 1% of the gross turnover of a person effective from 1st January 2021. According to this section, the Minimum Tax shall be payable by a person if the instalment tax payable by them is higher than Minimum Tax. Meaning, taxpayers with instalment taxes higher than 1% of their gross turnover are to additionally account for the Minimum Tax.
The Bill seeks to amend this section by replacing the term ‘higher’ with ‘lower’. If enacted into law, the Minimum Tax shall going forward only be applicable to taxpayers whose instalment taxes are lower than the Minimum Tax.
VAT Tax Rate: According to the press release, the National Treasury directed that the VAT rate will also revert to 16% up from the current 14% with effect from 1st January 2021. This change has not been catered for in the Bill instead, the Cabinet Secretary issued an order (the Value Added Tax (Amendment of the Rate of Tax) Order, 2020) on 11th December 2020 vide Legal Notice 206 notifying the public that the tax rate will with effect from 1st January 2020 revert to 16%.
Finally, it is important to note that although the Bill is drafted to come into force on 1st January 2021, the National Assembly is currently in recess until 8th February 2021.
If you would like further information or guidance on this development, please do not hesitate to contact us.
Article by Lynnette Wanyonyi.
Lynnette is an Associate in the Corporate, Commercial and Projects practice groups.