Within the Finance Bill 2024: new taxes, new powers for KRA

The legislative process for the next financial year’s budget begins today, when the Finance Bill 2024 is read for the first time in a special session of Parliament.

In an effort to increase tax revenues, the bill proposes a series of new tax measures and powers for the KRA that are bound to be controversial. Several of these will significantly increase the cost of critical goods and services, for both individuals and businesses.

  • The government plans to abolish VAT exemptions for some crucial banking services.
  • The bill also maintains the excise tax on several financial and telecom services at 15% for money transfer services, telephone, data, and at 12.5% ​​for betting and gambling.
  • It also maintains a 20% excise tax on fees charged by digital lenders, and introduces a similar rate on fees charged by banks.

Among the VAT exemptions on financial services that the bill seeks to remove include the issuance of credit and debit cards, money transfer services, foreign exchange transactions, check processes, the issuance of securities and the transfer of debt.

The 20% excise tax on “other fees charged by financial institutions” is likely to increase the cost of crucial financial services. Combined with the removal of VAT exemptions, this will significantly increase the tax bill for the banks. It appears to be a one-size-fits-all solution to a long-running dispute between lenders and the tax authorities over which fees and services were subject to which taxes. In several lawsuits, the dispute focused on taxation of fees such as interchange fees, management and professional fees, and taxes on royalty payments.

“…removing some of the exemptions, such as the transfer of debts for consideration and the issuance of securities for money, while granting the credit is exempt from VAT, is irrational,” analysts at law firm Bowman’s Law said in a review of the bills. .

New taxes

The bill aims to replace the current 1.5% digital services tax with a Significant Economic Presence Tax, which would require some foreign digital companies to pay 20% of gross sales. Another tax measure is a proposed minimum additional tax where the “combined effective tax rate… is less than fifteen percent.” It also increases tax liabilities for Kenyan digital companies to five percent, while foreigners will pay 20 percent.

Multinationals with a turnover of KShs 105 billion will pay a minimum additional tax, calculated as 15 percent of net income minus the actual tax rate, multiplied by excess profit. The bill also introduces an eco-tax “to ensure that manufacturers and importers…pay for the negative environmental impacts” of certain electronics and goods such as tires and diapers. In addition to other taxes – such as 10% on phone imports – this could significantly increase the price of the goods.

Among the most controversial changes are the abolition of VAT exemptions on bread and the introduction of a 2.5% annual tax on the value of cars, which will be bundled with insurance cover. The law will also replace the current flat tax rate on imported motorcycles above a certain price level with a 10% tax on the value.

For KRA, new teeth

The new law proposes to give tax authorities the power to require taxpayers to integrate eTIMs into their billing process or risk up to KSh2 million in fines for non-compliance. Given the slow uptake of the system by SMEs, this particular proposal appears to be aimed at encouraging compliance by small businesses as well.

Controversially, the KRA bill also provides certain exceptions to data protection law. If passed, it would amend the law to allow disclosure where “necessary for the assessment, enforcement or collection of any tax….” For example, in addition to data protection concerns, the eTIMS system has been an issue for the medical profession where services have high expectations of privacy.

Combined with a separate proposal to expand the KRA’s ability to require taxpayer-owed agents to withhold unpaid taxes, this represents a significant expansion of revenue collection powers.

Read the entire bill here.