The Finance Bill 2024 was announced on May 9th. This bill aims to change several existing tax laws, including Income Tax Act (Chapter 470, Laws of Kenya), the Value Added Tax Act, 2013, the Tax Procedures Act, 2015, the Miscellaneous Fees and Levies Act, 2016 and the Excise Duty Act, 2015. It also includes proposals to amend a section of the Data Protection Act 2018.
Public participation was opened albeit a shorter window was provided compared to last year. At 5pm on May 28th the deadline to share submissions and comments lapsed. Currently, submissions are being made before the National Assembly Finance & Planning Committee.
We take a look at the proposals in the bill relevant to the ICT sector.
KRA Exemption from Data Protection Act
The Bill seeks to amend section 51 of the Data Protection Act (Cap. 411C) to provide for the exemption of the processing of personal data that relates to the assessment, enforcement or collection of any tax or duty from the provisions of the Data Protection Act.
This rule change proposed, seeks to exempt the Kenya Revenue Authority (KRA) from the Data Protection Act, 2019. Hence, the tax authority will be granted free and unchecked access to personal data of Kenyan residents. The authority will have access that goes beyond the scope necessary for tax compliance.
If passed, KRA will be able to collect sensitive data arbitrarily and without the explicit consent of users. By doing so, it will be in contravention of Article 24 of the Constitution of Kenya (CoK). The proposal also violates Kenyans rights to privacy under Article 31 of the Constitution of Kenya.
Read: KRA Requests For Kenyan Airbnb Hosts Data In Ongoing Taxation Drive
Amendment to Tax Procedures Act
There is further proposal to amend Section 59A of Cap 469 B of the Tax Procedures Act. The Bill proposes a system for submitting documents electronically. The Commissioner will be authorized to set up a data management and reporting system to facilitate filing of required documents electronically.
The Bill grants the Commissioner the authority to mandate taxpayer integration with KRA’s electronic tax filing systems (eg. iTax) through issuance of written notices. This push to connect business systems directly to iTax reflects KRA’s ongoing commitment to using technology to combat tax evasion.
In the proposal, any failure to adhere to the notice by Commissioner to integrate such systems is criminalised and subject to a penalty that does not exceed KES 2 million for every month or part thereof that the failure continues.
eTIMS
The Bill proposes that any valid electronic tax invoice issued shall contain; words “TAX INVOICE”, the name, address and PIN of the supplier, the serial number of the tax invoice, the date and time of issuing the tax invoice. It will have the date and time of issuing the tax invoice, the description of the supply which includes the quantity of the goods and the type of services. In addition any details of discount allowed at the time of the supply the consideration for the supply, the tax rate charged and the total tax amount of tax charged.
Monthly SEPT to Replace DST
Finance Bill 2024 as proposed introduces a new framework for taxing income generated from digital content monetization. The Bill seeks to replace the Digital Service Tax (DST) with the Significant Economic Presence Tax (SEPT) payable by non-resident persons whose income from the provision of services is derived from or accrues in Kenya through a business carried out over a digital marketplace.
The current DST applies at the rate of 1.5% of the gross transaction value. DST came into effect in 2022. Under SEPT, the tax burden for creators on digital marketplaces will vary depending on residency. SEPT is applied at 5% for residents, compared to the 20% rate applicable to non-residents.
The Finance Bill 2024 proposes that SEPT is paid on a monthly basis on or before the 20th day of the following month. Effective 1st January 2025, the Bill proposes to repeal the existing DST provisions in the Income Tax Act and introduce a new provision on SEPT. The cabinet secretary for Treasury and National Planning will be required to develop regulations that will aid to enforce the proposals should the bill pass.
Finance Bill 2024 Proposal on WHT on Digital Platforms Earnings
The Bill proposes to introduce withholding tax (WHT) on income and payments made or facilitated by residents and non-residents who own or operate “digital marketplaces”. Further, the Bill proposes a change to the definition of “digital content monetisation” to include additional activities such as the offering of material electronically through any medium or channel, creative works, creating or sharing of the material or any other material that is not exempt.
In the proposal, a “digital marketplace” means an online or electronic platform which enables a person to sell or provide goods, property or services. The finance bill has illustrated these services via a list that includes services such as ride hailing apps, food delivery services, freelance services, professional services, rental services, task-based services and any other digital service that is not tax exempt.
Read: Upwork Connects and Taxation: What Kenyan Freelancers Need to Know
This means that any income earned through these online platforms, even by non-residents, will be considered Kenyan income and taxed accordingly. WHT, a tax deducted at the source, will be applied to payments made to both residents and non-residents on these platforms. The proposed amendments are intended to broaden the scope of taxation within the digital economy and promote tax adherence among individuals earning income online.
Non-resident taxpayers may eventually be required to pay WHT and other taxes. However, enforceability still remains undefined. In the past, KRA has faced the challenge of collecting excise duty from non-residents due to a lack of visibility. The administrative hurdle persists in implementing VAT and DST on digital products.
WHT on Software Licenses
The Bill proposes amending the Income Tax Act to treat payments made for the use or right to use software (proprietary or off-the-shelf) as royalties. This includes fees for licenses, development, training, maintenance, and support, as well as software distribution.
This is a proposal targeting the burgeoning SaaS market that has seen both local and international player grow. The Finance Bill 2024 proposes to apply withholding tax to software related payments whether for monthly packages or a software sale where Intellectual Property rights are transferred.
Alcohol, Betting Social Media Ads Excise Duty
The Bill proposes to extend the application of excise duty to advertisements for alcoholic beverages, betting, gaming, lotteries, and prize competitions displayed on the internet and social media platforms. The rate of this excise duty will be set at 15%. Previously, this tax was applicable for ads running on TV, Print and Radio.
On betting, there is a proposed 20% excise tax on betting stakes, meaning gamblers would pay KES 20 to the government for every KES 100 staked. This is an increase from the current 12.5% that was passed in the Finance Bill 2023.
Excise Duty on Money Transfer, Calls, and Banking Services
The Bill proposes to increase excise duty rates on excisable services such as telephone calls, internet usage, and money transfer services provided by banks and cellular phone service. The current excise duty charged on telephone and internet data services is 15% and the proposal is to raise it to 20%.
Secondly, fees charged for money transfer services by banks, money transfer agencies and other financial service providers are also subject to 15% excise duty and also face an increase of 5% in the finance bill 2024. Lastly, fees charged for money transfer services by cellular phone service providers and payment service providers licensed under the National Payment System Act, 2011 are also facing an increase of 5% to 20% excise duty.
Read: Kenya’s Digital Economy Tax Shakeup: How Finance Bill 2024 Could Make M-Pesa Expensive
Further, there is a proposed imposition of 16% VAT on financial transactions in the Finance Bill, 2024. The Bill introduces VAT on various financial services, including issuing credit and debit cards, telegraphic money transfers, foreign exchange transactions, cheque handling, and more.
Naturally, this will increase cost of banking to customers and curtail financial inclusion efforts, particularly affecting low-income individuals and small businesses. The proposed tax increase, coupled with existing excise duty, would raise the total tax burden on financial services to 40%, a significant rise from the current 15% excise duty.
The Kenya Bankers Association has opposed the proposal saying,” It has long been held, and rightly so, that while VAT applies to payments for goods and services, bank charges are not a direct payment for anything, but a cost recovery. Since banks are not delivering any goods to customers, bank charges are not considered VATable”
Finance Bill 2024 Removes ISP Tax Break
For manufacturers of excisable goods and internet providers, the Finance Bill 2024 removes a tax break that allowed them to reduce their overall tax bill. This means they’ll now have to pay full tax on their finished goods and internet services, without being able to deduct the tax they already paid on raw materials or bulk internet data.
This move is expected to increase excise duty collections for the Government. However, the repercussions are that Internet service providers (ISPs) will face higher costs and could lead to higher internet bills for Kenyans.
Repeal of Tax Exemption on Income Earned Under the Ajira Digital Program
The bill proposes removal of the 3-year income tax exemption for individuals registered under the Ajira digital program. The repeal will increase the tax liability for individuals registered under the Ajira Digital Program, reducing their net income. Further, this could discourage participation in the program, especially among youth and those in the gig economy who rely on this income.
Tax To EV Sector
The new bill proposes a value-added tax (VAT) on electric bikes, buses, and solar panels, along with lithium-ion batteries. A proposed Eco Levy, to be levied on specific goods manufactured locally or imported into the country has also been introduced. The Cabinet Secretary is empowered to make Regulations specific to this Eco Levy.
