How CS Mbadi's proposed new tax measures will directly affect you

A new Bill to be introduced in Parliament seeks to widen the tax base following the withdrawal of the Finance Bill, 2024 that denied the National Treasury Sh349 billion in ordinary revenue.      

On Friday, National Treasury Cabinet Secretary John Mbadi revealed in a newspaper notice plans to table a Tax Laws (Amendment) Bill in Parliament. 

The measures will, among others increase taxes on digital services, alcoholic beverages and other goods and services while at the same time offering relief on some services. 

A draft Bill seen by The Standard proposes a three per cent tax on the gross revenue of non-resident service providers operating in Kenya.

This will impact a wide range of online services, including ride-hailing, food delivery and streaming.

Additionally, a five per cent withholding tax will be imposed on payments made to resident service providers and a 20 per cent tax on payments to non-residents by digital marketplaces. 

The government also plans to increase excise duties on alcoholic beverages, particularly beer and spirits. However, it will offer tax relief on spirits made from local agricultural products.

Furthermore, excise duties will be imposed  or increased on various imported goods, including transformers, ink, ceramic products, telephone and internet services, and betting and gaming. 

To encourage investment in infrastructure, the government will introduce a five per cent withholding tax on interest earned from infrastructure bonds. However, this could discourage investment in this sector. 

The government also plans to remove tax exemptions on registered family trusts and impose taxes on gains from transferring property to such trusts. This could impact estate planning strategies. 

While these measures aim to boost revenue, analysts warn they could also have unintended consequences such as higher prices of goods and services for consumers. 

Beer lovers have been hit as the Treasury seeks to enhance sin taxes by restructuring Excise duty on wines, including fortified wines and other alcoholic beverages obtained by fermentation of fruits from Sh243.43 per litre to Sh22.50 per centilitre of pure alcohol.

It also restructures taxation on alcoholic beverages by reviewing the excise duty rate from Sh142.44 per litre to Sh22.50 per centilitre of pure alcohol for beer, cider, perry, opaque beer and mixtures of fermented beverages with non-alcoholic beverages and spirituous beverages with alcoholic strength exceeding six per cent.   

Mbadi has, however, proposed amendments to the Excise Duty Act to provide for excise duty remission on spirits made from sorghum, millet or cassava and any other agricultural products grown in Kenya to support farmers.  

According to Mbadi’s proposals, transformers and parts will attract an excise duty of 25 per cent, while imported ink (15 per cent), imported ceramic sinks and wash basins (35 per cent), imported float glass and surface ground or polished glass (35 per cent), and imported ceramic flags and pavings (35 per cent).   

Excise duty on telephone and internet services is also proposed for an increase to 20 per cent while betting, gaming, price competitions and lotteries will attract an excise duty of 15 per cent if the proposed Bills are enacted without amendments.    

The draft Bill proposes to repeal the provisions on digital service tax and introduce a tax known as significant economic presence tax.

It will be payable by a non-resident person whose income from the provision of services is derived from or accrued in Kenya through a business carried out over a digital marketplace and is at the rate of three per cent of the gross turnover earned by the non-resident.  

“Currently, non-resident persons are liable to pay digital service tax at the rate of 1.5 per cent of the gross turnover. Persons who shall be exempt from the significant economic presence tax are non-resident persons who offer digital services through permanent establishments in Kenya, non-resident persons who carry on the business of transmitting messages by cables, radio, optical fibre, television, broadcasting, internet, satellite, or other similar methods of communication, income subject to withholding tax, and non-resident persons providing digital services to an airline in which the government of Kenya has at least 45 per cent shareholding,” consultancy firm Bowmans, says in its analysis of the new proposals.     

The tax is due to the Kenya Revenue Authority (KRA) on or before the 20th day of the month following the end of the month in which the service was offered.   

The key difference is that the tax burden for non-residents will be significantly higher at the rate of three per cent of the gross revenue as opposed to the current digital service tax that applies at the rate of one point five per cent of the gross revenue.

The proposed measures will bring not just providers of ride-hailing services but also food delivery services, freelance services and professional services, into the tax net as part of the digital marketplace.   

“The definition is relevant for taxation or income accruing from business carried over the internet or an electronic network including the digital marketplace. This proposal will expand the tax base by bringing the income of the owners of the digital platforms that offer the above services into the tax net,” said Mbadi.   

The Bill proposes to deem income paid out by a resident or non-resident person, being the owner or operator of a digital marketplace or platform with respect to digital content monetization, goods, property or services to be income accrued in or derived from Kenya.   

A platform is defined as a digital platform or website that facilitates the exchange of a short-term engagement, freelance or provision of a service between a service provider who is an independent contractor or freelancer and a client or customer.   

Having deemed such income to be accrued or derived from Kenya, the Bill then proposes to require that owners and operators of digital marketplace or platforms withhold five per cent of the payment made to a resident person and 20 per cent where payments are made to a non-resident person.   

The Bill proposes to subject to withholding tax any payments made to a person for the supply of goods to a public entity.

The requirement to deduct withholding tax shall apply whether the payment is made to a resident person or a non-resident person without a permanent establishment.

The public entity shall deduct withholding tax at the rate of zero-point five per cent (0.5 per cent) of the payment made if the payment is to a resident person and five per cent (five per cent) if the payment is to a non-resident person. In relation to a non-resident person, the withholding tax shall be final. The income shall be deemed to be the person’s income for the year in which the payment is received.   

A public entity is defined as a ministry, state department, state corporation, county department, or agency of the national or county government.   

“The provision is a measure by the government to ensure that persons who supply goods to the government also pay tax. There are many instances where supply of goods by local persons to government bodies are paid for, but such persons do not account for tax on the payment received. With the introduction of withholding tax on payment for goods, it will now be possible for the suppliers to be tracked through iTax as the tax withheld will appear on their ledgers,” Bowmans says in its analysis.

In addition, non-resident suppliers of goods will likely increase the cost of such goods since the withholding tax deducted in Kenya may not be recoverable in their home countries, and further, it is unlikely that the concerned Government bodies will gross up their payments to account for the withholding tax.   

The Bill also proposes to subject to tax the interest income earned by resident and non-resident persons from all listed bonds, notes and other similar securities used to raise funds for infrastructure and other social services (commonly referred to as Infrastructure Bonds).

Accordingly, a five per cent withholding tax shall be applicable on the payment of such interest to resident and non-resident persons should the proposal be adopted.   

However, interest earned from Infrastructure Bonds listed before this proposal’s coming into force shall continue to be exempt from tax.   

However, experts warn that infrastructure bonds and bonds in general have become quite popular with both retail and non-resident investors with reports indicating that retail investors have overtaken traditional holders of government bonds such as insurers.