Finance Bill 2022: Over 30 Products to Attract Higher Taxes 

The Finance Bill, 2022 went through the First Reading on April 13, 2022, and to say it has led to an uproar among Kenyans would be an understatement.

From media personalities such as Caroline Mutoko, to industry leaders such as Mucai Kunyiha - Chairman Kenya Association of Manufacturers, Kenyans have been vocal about some of the proposed changes.

“As if Kenyans are not suffering already, in the Finance Bill 2022, Treasury has proposed the imposition of 16% VAT on wheat and maize flour. This will significantly increase food prices, including staples such as ugali and chapati.

“The proposed excise tax increase is projected to reduce barley production by 5,200 tonnes, translating to a loss of Ksh1.2 billion in income for farmers, according to Mucai Kunyiha,” Terryanne Chebet voiced in a tweet attributing the sentiments to the KAM chairman. 

So what are the actual proposed changes in Kenya’s Finance Bill 2022, and how do the changes affect you?

Let’s break it down to the contentious proposed changes and their implications on the everyday Kenyan.

Changes in Kenya’s Finance Bill 2022

In his budget speech, the Cabinet Secretary Treasury Ukur Yatani, proposed tax measure changes that he expects to generate an additional revenue of Ksh50.4 billion. 

This is how he plans to do it:-

Income Tax - Corporation Tax

Income realised from a registered family trust would now be subject to tax.

Proposed amendment - The Bill proposes to subject to tax income or principal sum of a registered family trust.

Implication - This may put off people from forming family trusts, which have been one of the vehicles for succession planning.

Digital Service Tax (DST)

Proposed provisions - The Bill proposes to increase the DST rate from 1.5% to 3% of the gross transaction value.

Implication - This provision is aimed at increasing tax revenues from digital services. This comes in the wake of ongoing global discussions on the taxation of the digital economy.

Non-resident persons with a permanent establishment in Kenya offered relief on Digital Service Tax.

Proposed provision - The Bill proposes to exclude non-resident persons with a permanent establishment (PE) in Kenya from paying DST.

Implication - The proposal is a relief to non-residents with a PE in Kenya who are already subjected to tax on the income derived from digital platforms.

According to the Proposed Bill, this is so as to avoid double taxation of the income derived from digital platforms by a Kenyan PE and create a level playing ground.

Increased Capital Gains Tax (CGT)

Proposed provisions - The Bill proposes to increase the rate of CGT from 5% to 15%.

Implication - The 200% increase is likely to elicit strong reactions from stakeholders. A significant portion of capital gains on disposal of properties is often attributable to general increase in prices as a result of inflation. 

Stakeholders explained that the proposed increase in CGT rate should have considered an inflation adjustment.

Value Added Tax (VAT)

Online Transactions

Proposed provision - The Bill is aimed at bringing clarity regarding online transactions subject to VAT. 

The following changes have been proposed:

• The Bill has proposed to amend the definition of a digital marketplace by deleting the expression “sell or provide services, goods or other property” and substituting it with the words “sell goods or provide services”.
• The Bill has also proposed to amend the VAT Act by including a provision that exempts services made over the internet or an electronic network or through a digital marketplace from Reverse VAT.
• The Bill has also proposed to amend the VAT Act by excluding persons supplying imported digital services over the internet or an electronic network or through a digital marketplace from meeting the Ksh5 million VAT registration threshold.

Implication - The proposed amendment clarifies what constitutes a “digital marketplace” for VAT purposes. 

VAT Exempt Goods Shake-Up

The Bill proposed the reclassification of goods from VAT exempt status to standard-rated.

If enacted, the following goods and services would be subject to VAT at the standard rate of 16%:-

• Taxable goods for the direct and exclusive use in the construction and equipping of specialised hospitals with a minimum bed capacity of 50.
• Taxable services for the direct and exclusive use in the construction and equipping of specialised hospitals with accommodation facilities.
• Notably, any exemption provided before assent of the Finance Act 2022, would continue until the taxable goods and services in question are supplied in full.

Implication - The intention of introducing the exemption was to make access to health affordable and therefore the deletion would result in the exact opposite.

Overpaid VAT or Errors 

The Bill proposes to delete the provision of the VAT Act relating to VAT paid in error and move its administration to the Tax Procedures Act. 

Presently, a taxpayer may apply for a refund of VAT paid in error within 12 months of making the error. This will now be reduced to 6 months if the Bill is passed.

Proposed reclassification of goods from Zero rating status to Standard rated

Proposed provision - The Bill proposes to standard rate goods purchased from duty free shops by passengers departing to places outside Kenya.

Implication - The zero rating of goods sold at duty free shops is a practice held by many countries in the world as the goods are exported outside Kenya. This proposal will lead to increased prices of the goods sold at the duty free shops.

Excise Duty

Provision - The Bill seeks to amend the First Schedule to the Excise Duty Act 2015 to increase excise duty rates as below:-

• Fruit juices (including grape must), and vegetable juices, unfermented and not containing added spirit, whether or not containing added sugar or other sweetening matter – From Ksh12.17 per litre, to Ksh13.30 per litre.

• Cosmetics and Beauty products -  From 10% To 16%.

• Bottled or similarly packaged waters and other non alcoholic beverages, not including fruit or vegetable juices – From Ksh6.03 per litre, to Ksh6.60 per litre.

• Beer, cider, perry, mead, opaque beer and mixtures of fermented beverages with non alcoholic beverages and spirituous beverages of alcoholic strength not exceeding 6% - From Ksh121.85 per litre, to Ksh134 per litre.

• Powdered Beer – From Ksh121.85 per KG, to Ksh134 per KG.

• Wines including fortified wines, and other alcoholic beverages obtained by fermentation of fruits – From Ksh208.20 per litre, to Ksh229 per litre.

• Spirits of undenatured ethyl alcohol; spirits liqueurs and other spirituous beverages of alcoholic strength exceeding 6% - From Ksh278.70 per litre, to Ksh335.30 per litre.

• Reduction of excise duty for cigars, cheroots, cigarillos, containing tobacco or tobacco substitutes – From Ksh13,906.04 per KG, to Ksh13,296.60 per KG.

• Cigarettes with filters (hinge lid and soft cap) – From Ksh3,447.61 per mille, to Ksh3,825.99 per mille.

• Cigarettes without filters (plain cigarettes) – From Ksh2,502.74 per mille, to Ksh2,752.97 per mille.

• Other manufactured tobacco and manufactured tobacco substitutes; “homogenous” and “reconstituted tobacco”; tobacco extracts and essences” – From Ksh9,734.45 per KG, to Ksh10,707.88 per KG.

• Motorcycles of tariff no. 8711 other than motorcycle ambulances and locally assembled motorcycles – From Ksh12,185.16 per unit, to Ksh13, 403.64 per unit.

• Imported sugar confectionary of tariff heading 17.04  - From Ksh36.74 per kg, to Ksh40.37 per kg

• White chocolate, chocolate in blocks, slabs or bars of tariff nos. 1806.31.00, 1806.32.00 and 1806.90.00 – From Ksh200 per kg, to Ksh242.29 per kg.

• Jewellery of Tariff heading 7113 and imported jewellery of Tariff heading 7117” – From 10% To 16%.

• Products containing nicotine or nicotine substitutes intended for inhalation without combustion or oral application but excluding medicinal products approved by the Cabinet Secretary responsible for matters relating to health and other manufactured tobacco and manufactured tobacco substitutes that have been homogenised and reconstituted tobacco, tobacco extracts and essence – From Ksh1,200 Per KG, to Ksh2,600 Per KG.

• Betting: Wager or stake – From 7.5% to 20%

• Gaming: Wager or stake - From 7.5% to 20%

• Prize competition - From 7.5% to 20%

• Lottery (excluding charitable lotteries) - From 7.5% to 20%

Introduction of Excise Duty on New Products and Services

• Electronic cigarettes and other nicotine delivery devices – From N/A, to 40%

• Liquid nicotine for electronic cigarettes - From N/A, to Ksh70 per ml

• Ice cream and other edible ice whether or not containing cocoa of tariff number 2105.00.00 - From N/A, to 16%

• Fees charged by all television stations, print media, billboards, and radio stations for advertisements of gambling, gaming and alcoholic beverages - From N/A, to 16%

Increase in the scope within the First Schedule to the Excise Duty Act, 2015: Glass bottles

This relates to imported Glass bottles (excluding imported glass bottles for packaging of pharmaceutical products).

Implication - Excise duty on bottles is currently levied on imported bottles only. If the Bill is passed, all glass bottles whether imported or manufactured locally will be subjected to excise duty. 

This will increase the cost of items packaged in glass bottles. This increase may then discourage the use of glass bottles and manufacturers may resort to using plastic bottles to remain competitive in the market. 

The move also puts at a disadvantage local manufacturers of bottles who have to cope with higher operating cost compared to their international competitors.

Exemptions from Excise Duty

The Bill also seeks to amend the Second Schedule to the Excise Duty Act, 2015 to exempt specific products from excise duty as below. 

• Hatching eggs imported by licensed hatcheries – From 26%, to Exemption (0)

• Neutral spirits imported by registered pharmaceutical manufacturers – From Ksh278.7 per litre, to Exemption (0).

• Locally manufactured passenger motor vehicles – From 20% to 35% dependent on cc rating and fuel, to Exemption (0).

Implications -  Hatching eggs; The proposal to exempt importation of hatching eggs is a welcome move in the agricultural sector as Kenyans will have access to cheaper eggs for hatching, consequently increasing the poultry and lowering costs of eggs which in the recent past has been on the rise.

Neutral Spirits; The exemption of Neural spirit, which is used in the manufacture of local pharmaceutical products, is likely to lower the cost of manufacturing and will allow Kenyans to have increased access to quality medical care. It's also intended to encourage investment in this crucial sector of the economy.

Locally manufactured passenger cars - This proposal is aimed at reducing the cost of locally manufactured passenger vehicles. 

WRAPPING UP

There are a good number of proposed changes that could potentially increase the burden of Kenyan taxpayers.

Perhaps more controversial is the requirement for taxpayers to deposit 50% of the disputed amount before filing an appeal against a tax tribunal decision. 

This could explain why a good number of Kenyans are already reaching out to their legislators in an effort to ‘kill’ the Bill.

The Finance Bill 2022 was tabled in the National Assembly earlier than usual to facilitate its passing before the National Assembly takes a break to prepare for the general elections that are scheduled for August 2022.