Salaries, fuel & other taxable items affected by nullification of Finance Act 2023

This nullification disrupts the implementation of critical tax policies and raises concerns about the government's fiscal strategy moving forward.

Here, we explore the major tax measures affected by the court's decision and their potential implications.

Former Treasury CS Njuguna Ndung'u in Parliament to deliver the 2023/24 Budget Policy Statement Treasury CS Njuguna Ndung'u in Parliament to deliver the 2023/24 Budget Policy Statement Pulse Live Kenya

The Finance Act 2023 introduced several significant tax measures in Kenya, effective from various dates, primarily aimed at increasing revenue and expanding the tax base. Here are the key highlights:

Value Added Tax (VAT) and Levies

VAT on petroleum products, excluding liquefied petroleum gas, was increased from 8% to 16%, significantly impacting fuel prices.

The Finance Act 2023 zero-rated VAT for

Liquefied petroleum gas (LPG)
Supply of locally assembled and manufactured mobile phones;
The supply of motorcycles of tariff heading 8711.60.00;
The supply of electric bicycles.
The supply of solar and lithium ion batteries;
The supply of electric buses of tariff heading 87.02;
Inputs or raw materials locally purchased or imported for the manufacture of animal feeds;
Bioethanol vapour (BEV) stoves classified under HS Code 12.00 (cooking appliances and plate warmers for liquid fuel)
All tea and coffee locally purchased for the purpose of value addition prior to exportation subject to approval by the Commissioner General.

Excise Duty

The Finance Act 2023 proposed the excise duty as follows

Item	Previous Rate	Current rate
1. Telephone and internet data services	20%	15%
2. Fees charged for money transfer services by Banks, money transfer agencies, and other financial service providers	20%	15%
3. Fees for money transfer services by cellular phone service providers and payment service providers licensed under ‘National Payment System Act, 2011.	12%	15%
4. Excise duty rate on betting; gaming; prize competition and on lottery	7.5%	12.5%
5. Advertisement on television, print media, billboards and radio stations on alcoholic beverages, betting, gaming, lotteries and prize competitions	None	15%

The following items were also brought under the tax net

No.	Product	Excise Duty rate
1.	Imported fish	10%
2.	Powdered juice	Shs. 25 per Kg
3.	Imported sugar excluding imported sugar purchased by a registered pharmaceutical manufacturer	Shs. 5 per Kg
4.	Imported cement	10% of the value or shs. 1.50 per kg, whichever is higher
5.	Imported furniture of tariff heading 9403 excluding furniture originating from EAC Partner States that meet the EAC Rules of Origin	30%
6.	Imported cellular phones	10%
7.	Imported paints, varnishes and lacquers of heading 3208, 3209 and 3210	15%
8.	Imported non-virgin test liner of heading 4805.24.00	25%
9.	Imported non-virgin fluting medium of heading 4805.19.00	25%
10.	Imported cartons, boxes and cases of corrugated paper or paper board and imported folding cartons, boxes and case of non-corrugated paper or paper board and imported skillets, free-hinge lid packets of tariff heading 4819 .10 .00 , 4819.20.10 and 4819.20.90	25%
11.	Imported plates of plastic of tariff heading 3919.90.90, 3920.10.90, 3920.43.90, 3920.62.90 and 3921.19.90	25%
12.	Imported paper or paper board labels of all kinds whether or not printed of tariff heading 4821.10.00 and 4821.90.00	25%

A mandatory housing levy was introduced, requiring both employers and employees to contribute 1.5% of the employee's gross salary to the National Housing Development Fund.

However, the housing levy was later anchored on the Affordable Housing Act, 2024 which means it will not be affected.

Income Tax Changes

The Act introduced new income tax rates for individuals. A rate of 32.5% was applied to monthly income between Sh500,000 and Sh800,000, while a 35% rate was set for income exceeding Sh800,000.

Travel allowances provided to employees for official duties were exempted from taxation, provided they adhered to the approved standard mileage rate.

Club entrance and subscription fees paid by employers on behalf of employees were classified as taxable benefits, thereby subjecting them to income tax.

A relief of 15% on contributions to post-retirement medical funds was introduced, capped at Sh60,000 per annum, effective January 1, 2024.

Monthly Salary	Rate in each shilling
On the first KSh. 24,000	10%
On the next KSh. 8,333	25%
On the next KSh. 467,667	30%
On the next KSh. 300,000	32.5%
On all income over KSh. 800,000	35%

Digital Content Monetisation

Digital content monetisation was subjected to withholding tax at the rate of 5% for residents and 20% for non-residents without a permanent establishment in Kenya.

Compliance and Administrative Changes

To enhance tax compliance, expenditures or losses would not be deductible unless invoices were generated through the electronic tax invoicing management system (e-TIMS), effective January 1, 2024.

The Act mandated that withholding tax be remitted to the Kenya Revenue Authority within five days of payment, tightening the timeline for tax compliance.

A general view taken on March 26, 2015 in Nairobi shows the Kenyan parliament, as President Uhuru Kenyatta addresses two Houses the Senate and the National Assembly. President Kenyatta's speech comes against the backdrop of rising corruption and insecurity in the country. AFP PHOTO/SIMON MAINA (Photo credit should read SIMON MAINA/AFP via Getty Images) Pulse Live Kenya

Corporate and Other Taxes

The Act imposed a 15% tax on repatriated income for non-residents with a permanent establishment in Kenya.

Additionally, the Corporate Income Tax (CIT) rate was reduced from 37.5% to 30%, effective January 1, 2024.

The upper threshold for turnover tax was reduced from Sh50 million to Sh25 million, with an increase in the tax rate from 1% to 3%.

A new tax of 3% was introduced on income derived from the transfer or exchange of digital assets, effective September 1, 2023.

Withholding Tax

Withholding tax on payments for use of immovable property was reduced from 10% to 7.5%.

The Finance Act 2023 introduced withholding tax on the following payments:

Sales promotion, marketing and advertising services for residents -5%
Digital content monetization to residents at 5% and at 20% to non-residents;
Rental income received on behalf of the owner of a premises provided that only a person appointed by the Commissioner in writing shall deduct tax with regard to rental income.

Advance tax

The advance tax was reviewed as follows

Vans, pickup trucks, prime movers, trailers and lorries - Sh2,500 per tonne of load capacity per year or Sh5,000 per year whichever is higher.
Saloons, station wagons, mini-buses, buses and coaches - Sh100 per passenger capacity per month or Sh5,000 per year whichever is higher.

Rental Income

Residential Rental income tax (MRI) rate was reduced from 10% to 7.5%.

Mortgage interest claims

Individuals were allowed to claim mortgage interest expense to a maximum of Sh300,000 per year incurred on money borrowed from a co-operative society.

The act introduced tax on the income derived from the transfer or exchange of digital assets (such as crypto currency transactions) at a rate of 3%.

The nullification of the Finance Act, 2023 by the Court of Appeal has rendered these measures void, leading to significant uncertainty in the tax landscape.

The government had aimed to enhance revenue collection and improve fiscal policy through these measures.

However, the annulment disrupts the implementation of these taxes, potentially impacting government revenue and fiscal stability.

In the absence of an appeal the government will have to revert to using the Finance Act 2022.