A Comprehensive guide to taxes in Kenya in 2021

“Taxes are the price we pay for a civilized society.”

Thomas Jefferson

Tax is one of those subjects that most of us want to remain ignorant in, and purposefully so because we find it too complex to understand or deal with. Most of us would rather ask our friends and be done with it. Today we discuss taxes, and hopefully, demystify them with a comprehensive guide for tax in Kenya in 2021.

As always, this blog post is for informational purposes and does not serve as tax advice. Please engage the services of a tax consultant to assist you with your particular tax circumstances.

Let’s delve in.

WHAT IS TAX?

Tax is money paid to the government on income earned, goods manufactured, consumption of goods and services by residents (people who live) and non-residents (people who don’t live) persons in Kenya.

In Tax law, Persons can either be Natural i.e. human beings or; Legal e.g. Companies and other organizations.

Taxes are used for various expenditures such as paying for civil servants who work for the government, such as the military, teachers, and police. They are also used in the provision of services; such as education, healthcare, and to maintain or build infrastructures like roads, bridges, and dams.

WHAT GUIDES A GOOD TAX SYSTEM?

Even though taxes are usually not negotiable, the administration of the taxes is usually guided by certain principles. Tax experts generally agree on the following principles.

1. The principle of Equity

A government should exercise equity while designing a good tax system. Persons should be taxed based on the amount of income they earn. Those that earn a lot of money should bear higher taxes proportionate to their large income. For the person that earn lower incomes then the tax paid should be reflective of the income earned.

2. The principle of Flexibility

A good tax system should be flexible to meet the needs of society. Ordinarily, tax rates should not be static, but they should be changed, to reflect the performance of the economy. When the government experiences a boom, it should lower the tax rate, so the taxpayers enjoy the social benefit. When the economy is depressed, the government may increase the amount of tax charged to raise maximum funds to finance its projects.

3. The economic principle

The primary objective of taxation is to raise money for the government to finance its projects. Therefore, all effort should be made so that the administrative cost of collecting the tax does not surpass the amount that is collected.

4. The principle of Simplicity

Simplicity means that the tax system should be easy for taxpayers to understand. They should know what tax is applicable to them, when it is due and where to pay the tax. The payee should be able to understand the concept & terminologies used and how the government comes up with such tax amounts. The government should design a simple way of collecting the tax. E.g. at the end of each month for employed workers.

5. The principle of Diversity

A good tax system should be diverse. It should be able to scale up and capture areas that have previously not been subject to tax and introduce them into the taxation bracket. However, this principle needs a delicate balance. If it is not well executed, it may impede the economic development of major sectors of the economy.

6. The principle of Certainty

The amount of chargeable tax should be certain. It should be well known by the taxpayer so that they can prepare and budget appropriately. The government should also make it clear how they will collect the taxes, at the end of a fiscal period.

7. The principle of utmost good faith

There needs to be transparency in the way the government collects its taxes. The records of the total amounts collected should be open to the public for scrutiny.

The government should also conduct an excellent tax audit and avail the findings to the public.

TYPES OF TAXES APPLICABLE IN KENYA

1. Income Tax

Income tax is charged for each year of income. It is charged on all the income of a person, whether resident or non-resident.

The tax is on income that is accrued in or was derived from Kenya.

Income Tax administration is anchored in the Income Tax Act.

Income Tax is imposed on;

Business income from any trade or profession
Employment income & Pension Income
Dividend &Interests, natural resource income etc
Income from a Digital Marketplace
Rent income
Capital Gains

There are different methods of collecting business income tax from companies, partnerships, and individuals based on their sources of income.

These methods include:

a) Business income;

We will look at Corporation Tax and Turnover tax

i) Corporation Tax

This is a form of Income Tax levied on corporate bodies such as Limited companies, Trusts, and Co-operatives, on their annual income. The corporation tax rate is 30% for incomes earned from 1^st January 2021

Companies that are based outside Kenya but operate in Kenya or have a branch in Kenya pay Corporation Tax on income accrued within Kenya only

ii) Partnerships

Partnerships do not pay corporation tax. Their profit is distributed to the individual partners in the ratio of their ownership. The profit then forms part of each individual’s income, from where it is taxed.

Partnerships declare their profit through the Income Tax -Partnership Return (IT2P)

iii) Turnover tax

It is a tax levied at the rate of 3% of the gross turnover, for Small & Medium-Sized Enterprises (SMEs). Turnover is the Sales of a business.

The following income sources are not subject to turnover tax

Management and professional services,
Rental properties
Incorporated companies.

The tax is applicable for SMEs expected to earn less than Kshs 5 million per annum and more than Kshs 500,000.

It is a final tax and therefore the business income will not be subjected to further tax.

b) Pay As You Earn (PAYE)

PAYE tax is collected at source from individuals in gainful employment.

Companies and Partnerships with employees are required to deduct PAYE tax according to the prevailing tax rates from their employees’ salaries or wages on each payday in a month.

PAYE Bands applicable from 1^st January 2021

Tax Bands	Rate of tax
On the first Kshs 24,000 per month or Kshs 288,000 per annum	10%
On the next Kshs 8,333 per month or Kshs 100,000 per annum	25%
On all income amounts above Kshs 32,333 or Kshs 388,000 per annum	30%

The applicable monthly personal relief is Kshs. 2,400 per month or Kshs 28,800 per annum.

Tax on Pension Income is computed as follows

Pension Income; Tax Bands applicable from 1^st January 2021

Tax Bands	Rate of tax
Any amounts in excess of the tax-free amount
On the first Kshs 400,000	10%
On the next Kshs 400,000	15%
On the next Kshs 400,000	20%
The balance of amounts that exceeds Kshs. 1,200,000	25%

Both PAYE and the taxes on Pension income ought to be remitted to Kenya Revenue authority on or before the 9^th of the following month.

c) Withholding Tax (WHT)

This is a tax that is deductible from certain classes of income; at the point of making a payment to persons who are non-employees.

WHT is deducted at the applicable tax rate on payments.

Examples of Withholding Tax Rates

Payment Type	Examples	Tax Rates
		Residents	Non-Residents
Dividends	Company Dividends	5%	15%
Interest	Interest earned on treasury bills & bonds; SACCO deposits and Bank deposits	15%	15%
Training	Training by professionals	5%	20%
Royalties and natural resource income	Software license fees	5%	20%
Management and professional fees	Consultancy fees, audit & legal fees	5%	20%
Consultancy fees East Africa citizens	Consultancy fees, audit & legal fees	–	15%
Lease of equipment	Hire of equipment	–	15%
Contractual fee	Fees paid to contractors for the construction of infrastructure	3%	20%

Companies and partnerships making the payment, are responsible for deducting and remitting the tax to the Commissioner of Domestic Taxes.

Income tax is further administered as;

d) Advance Tax

This is a tax paid in advance before a public service vehicle or a commercial vehicle goes for the annual inspection.

It is not a final tax and it is usually due on the 20th of January.

e) Installment Tax

Installment tax is paid by persons who have tax payable for any year that amounts to Kshs. 40,000 and above.

There are two ways of estimating installment taxes:

The previous year’s tax liability is increased by 10% then divided into four installments or
The current year estimate of tax liability is divided into four equal installments. Whichever is lower will be applicable.

f) Minimum Tax

The tax was introduced, with effect from 1^st January 2021.

The tax is applicable where the installment tax is less than 1% of the gross turnover. It is payable quarterly by the 20^th of the fourth, sixth, ninth, and twelfth months.

The following incomes are not subject to Minimum Tax:

Exempt income
Employment income
Residential Rental Income
Income subject to Turnover Tax
Income subject to Capital Gains Tax
The income of extractive sector
A person whose retail price is controlled by the Government
A person engaged in the Insurance business
Income that is subject to withholding tax, including Digital Service Tax

Minimum Tax is payable on an installment basis on the 20^th day, of the 4^th, 6^th, 9^th, and 12^th month of the accounting period. The tax rate is 1% of gross turnover as provided in the table below:

Payment	Applicable Turnover	Date Payable
1^st Payment	1^st, 2^nd & 3^rd months	20^th day of the 4^th month
2^nd Payment	4^th & 5^th months	20^th day of the 6^th month
3^rd Payment	6^th, 7^th & 8^th months	20^th day of the 9^th month
4^th Payment	9^th, 10^th & 11^th months	20^th day of the 12^th month
Balance of Tax		By the last day of the 4^th month after the end of an accounting period

g) Digital Service Tax

The Finance Act, 2020 introduced Digital Service Tax (DST) at the rate of 1.5% of the Gross Transaction Value (GTV) effectively from 1^st January 2021.

The GTV is defined as:

The consideration received in respect of the service provided in the case of a digital service provider; and
The commission or fee paid, for the use of a digital platform in the case of a digital marketplace provider.

The GTV excludes the Value-Added Tax (VAT) charged for the service.

Accounting for Digital Service Tax

Digital marketplace providers and digital service providers in Kenya, whether resident or non-resident, are required to register for DST obligation.

Non-resident persons; without a Permanent Establishment (PE) in Kenya have the option of;

1) Appointing a tax representative who will account for the tax on their behalf or

2) Register through the simplified form of registration.

Taxpayers or their tax representatives are to submit a monthly return using a prescribed form and remit the DST by the 20^th day of the month following the end of the month when the digital service was offered.

The return may be amended, per the provisions of the Tax Procedures Act, 2015. However, where an amendment results in a tax overpayment, the amount overpaid shall be retained as credit and offset against the DST payable in the subsequent tax period, in the case of a non-resident person without a PE.

In the case of a resident or a non-resident person with a PE in Kenya, the amount overpaid is refundable.

A person liable to DST is required to keep records in line with the provisions of the Tax Procedures Act, 2015. Kenya has a five-year statute of limitation rule implying that the records should be kept for a minimum of five years.

Any person who fails to pay DST or comply with the DST compliance provisions will be subject to penalties prescribed by Kenyan tax laws.

h) Rental Income Tax

This is a tax charged on rental income received from renting out property. Taxation of rental income depends on how the usage of the rented property for residential or commercial purposes.

All persons, individuals, partnerships, and companies that rent out a property to other persons for either residential or commercial use are required to pay income tax on rent received

Individuals earning more than KShs 288,000 up to KShs 15 Million per annum from residential property, are required to account for Monthly Rental Income tax of 10% of gross rent and remit the same by the 20^th day of the following month after receipt of the rental income.

To facilitate compliance, KRA appoints agents to withhold and pay, a percentage of the gross rent as tax, currently at 10%.

The tax agents appointed, can be verified via the agent checker on iTax.

i) Capital Gains Tax

Capital Gains Tax (CGT) is the tax that is levied on the transfer of property situated in Kenya whether it was acquired on or before January 2015.

The current tax rate is 5% of the gain and is paid by the seller or the transferor of a property.

It is a final tax and therefore not subjected to further taxation after payment.

There are three CGT types:

CGT 1 is applied to land and buildings;

CGT 2 is used for shares and,

CGT 3 is for the exemptions which are all listed on iTax.

Property may be transferred from one party to another through gifting, inheritance, selling e.tc.

Not all cases of transfer of property attract payment of CGT.

The exempt & exceptional situations include;

Income that is taxed elsewhere;
Sale of land by individuals where the proceeds are less than 3 million,
Sale of marketable securities; This has served to encourage investing at the Nairobi Securities Exchange.
Disposal of property for purpose of administering the estate of a deceased person
Transfer of property between spouses as part of a divorce settlement.
Vesting property to a liquidator or receiver
Transfer of machinery including motor vehicles,

These are just a few examples of the exemptions and exceptions

When calculating CGT, there are three terms used:

The Net transfer value is the transfer value less incidental expenses to the transfer.
Adjusted cost of the property, this is the cost of acquisition, expenditure for enhancement of preservation of the property; the cost of defending title over the property, and incidental costs of acquiring property.
Capital Gain or Loss is the net transfer value less the adjusted cost of the property. The 5% CGT is applied to the capital gain.

2) Value Added Tax (VAT)

Value Added Tax is charged on the supply of taxable goods or services made or provided in Kenya and on the importation of taxable goods or services into Kenya.

Value Added Tax administration is guided by the VAT Act.

The VAT rate is 16% effective from 1^st January 2021.

While companies & partnerships can voluntarily register for VAT they MUST register if their annual revenue exceeds Kshs. 5,000, 000.

To facilitate compliance, KRA appoints agents to withhold and pay VAT on supplies made. The current withholding VAT rate is 2% of the taxable value.

The tax agents appointed can be verified via the agent checker on iTax.

3) Excise Duty

This is a duty of excise imposed on;

goods manufactured in Kenya, or;
imported into Kenya and specified in the 1^st schedule to Excise Duty Act, 2015.

Companies and Partnerships dealing in excisable goods and services are required to pay excise duty.

The Excisable goods and services are listed in the 1^st Schedule to the Excise Duty Act, 2015 which includes the following among others:

Item	Excise Duty rate
Mineral water charged excise duty at the rate of KShs 5.74 per litre	KShs 5.74 per litre
Juices, soft drinks	10%
Cosmetics and Preparations for use on hair	10%
Beer	KShs 100 per litre
Telephone and data services-	15%
Fees charged for money transfer services	12%
Financial services	20%

4) Agency Revenue

This is a type of payment that KRA collects on behalf of various revenue collection agencies in Kenya.

The two types of Agency Revenue include;

Stamp Duty
Betting and Pool Tax

Stamp Duty

Stamp duty is a tax charged on the transfer of properties, shares, and stock.

It is collected by the Ministry of Lands, which has seconded the function to the Kenya Revenue Authority

2. Betting Tax

Betting Tax is chargeable on the Gross Gaming Revenue (GGR) of a bookmaker at the rate of 15% as provided by Section 29A of the Betting, Lotteries and Gaming Act, 1966.

Betting, gaming, and Lottery businesses are required to withhold as tax and remit to KRA 20% of the winnings being paid out to winners.

Excise Duty on Betting is chargeable at the rate of 20% of the amount wagered or staked, effectively from 7^th November 2019.

In conclusion, whatever your tax situation, it is important to engage a tax expert because they could save you a lot of trouble.

What’s your tax story? Let me know in the comment section below.

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