Tough Times Ahead as Treasury Tables Kenya’s Biggest-ever Budget

On May 5, 2021, the Finance Bill, 2021, was tabled before the National Assembly for the first reading in line with current practice of tabling finance bills for debate before budget reading in June. 

Among the several tax-related amendments proposed are measures affecting income tax, VAT and excise duty. Some prior court rulings in favor of taxpayers have been factored in including the tax on exportation of services with an aim of denying taxpayers input VAT refund. 

It also proposes the adoption of a number of international tax practices including the limitation of digital service tax to non-resident entities, and introducing a country-by-country (CbC) reporting for multinationals. 

VAT on previously zero-rated commodities

A proposal that has already raised a heated public debate is the introduction of 16% VAT on essential commodities such as bread and infant milk - commodities that were previously zero-rated. 

The impact of this measure has been highly contested due to the expected effect such taxes have on the cost of living.

While the price of a loaf of bread will not increase by 16% on account of VAT - this is due to the fact that its supply is still listed under tax exempt supplies - a slight increase is expected since manufacturers have been barred from lodging claims to recover input taxes. 

The price of infant powder milk (also known as ‘baby formula’), which is also targeted, is expected to rise by 16% further burdening families dependent on this commodity. 

More pain for borrowers

While the Finance Bill 2020 proposes to scrap the 20% excise duty on loan fees - construed to signal a possible decrease in the cost of credit for both private and corporate borrowers, it also includes a proposal that introduces a 20% increase on loan processing fees. 

The first proposal will see banks save up to Ksh7 billion annually in taxes, easing their need to increase loan costs. 

However, it is not exactly clear what the banking industry’s response will be to the 20% increase in loan processing fees with fears being that the benefit of the first proposal could be diminished by the second. 

Excise duty on ‘other fees’ has in the past been a contentious issue between the KRA and financial institutions due to lack of clarity on whether or not fees and commissions earned in respect of loans constitute ‘other fees’ subject to excise duty.

“The Finance Act 2019 clarified that ‘fees and commissions earned in respect of a loan or any share of profit’ are not subject to excise duty and this dissipated tax disputes.

“In our view with the proposed change, disputes between KRA and the banking sector are likely to reemerge regarding accounting for excise duty on these income streams,” a PWC report on the Finance Bill 2021 reads in part. 

Removal of Parliament’s Oversight on VAT Approval

Yet another controversial proposal in the bill is an attempt to remove the requirement for the National Treasury CS to table any VAT-related regulations to Parliament for approval. 

If adopted by Parliament, then the National Treasury will have been given the free reign to come up with and implement new tax measures without any Parliamentary approval.

Analysts see this as an attempt by the Treasury to yield to pressure from the International Monetary Fund (IMF) to bolster tax revenue collection. Kenya is the only East African Community (EAC) member that does not have its VAT set at 18% (now at 16%). 

“If this amendment is passed into law, this will raise a Constitutional concern as the National Treasury will be at liberty to implement new VAT legislations without going through the National Assembly for approval.

“...the proposed deletion goes against the spirit of the Constitution as envisaged in the  Statutory Instruments Act (STA) as it seeks to remove the Parliamentary oversight on Regulations,” a report by accounting firm KPMG warns. 

More Taxes

The Finance Bill, 2021, also proposes the inclusion of more goods and services under the excise duty regime including locally manufactured sugar confectionery and white chocolates as well as re-introduce the 20% excise duty on sports betting wagers and stakes.  

This coming just a year after the duty - that had led to the dramatic exit of Kenya’s then-largest betting firms - had been removed by Parliament. 

“This could see punters pay billions of shillings in tax. The tax was initially introduced in the year 2019 but was removed in July last year through the Finance Act 2020 following lobbying by betting firms. If this proposal is passed, the current duty reprieve will indeed be short-lived,” KMPG analysts predict.

Digital Services Tax

The bill further proposes an expansion in the definition of ‘digital services’ to include supplies made over the internet or an electronic network in addition to those made through a digital marketplace. 

The definition of a ‘digital marketplace’, if passed, will be expanded to mean an online platform that enables users to sell or provide services, goods or other property to other users. 

This means digital services subject to VAT will then include those made over the internet or an electronic network. 

Also, the expansion of the ‘digital marketplace’ definition will then be used to determine what comprises ‘digital services’ for the purpose of charging VAT. 

If adopted by Parliament, these among other changes will take effect on July 1, 2021 - the beginning of the 2021/2022 financial year that the Treasury has fronted a record-breaking Ksh3.6 trillion budget estimate. 

Of this, the National Treasury expects to raise Ksh1.776 trillion in taxes hence the proposed amendments. 

HELB Funding Shocker

Meanwhile, following the release of the 2020 Kenya Certificate of Secondary Education (KCSE) results where 144,033 students qualified to join university, the Higher Education Loans Board (HELB) on which many are dependent to finance their studies says nearly 100,000 students may miss out on funding. 

HELB CEO Charles Ringera said that due to budgetary cuts and non-performing loans 95,000 students would miss out on loans while further lowering the upper loan limit for those who are lucky to qualify. 

“In the supplementary budget estimates for 2020-2021, there was an adjustment of Ksh2.2 billion because there were no resources from the Treasury. On the flipside of that, we have also lost Ksh1 billion due to Covid-19 impact on loan recoveries,” he said.