The Finance Bill, 2019 was finally assented into law on the 7th of November, 2019. The Act expands the Government’s revenue base through the introduction of tax on income raised from the digital economy, re-introduction of turnover tax, expanding the scope of VAT among others. We extensively analysed the Act as follows:
- Taxation of Digital Economy
The Finance Act, 2019 amends Section 3 of the Income Tax Act, Cap 470 by introducing Tax on income accruing from the digital marketplace. The government targets the increased use of internet and electronic devices in marketing of businesses, and effective the 7th of November, 2019 levies tax on income accruing from the Digital marketplace. Under the Act, income chargeable to tax now includes income accruing through a digital marketplace. The Act defines digital marketplace as a platform that enables the direct interaction between buyers and sellers of goods and services through electronic means. Even as taxation of digital economy is a welcome move and necessary, it is not very clear which kind of digital businesses are targeted as most of them do not have physical places of business. The Cabinet Secretary has been tasked to provide regulations on the mechanisms through which the taxation will be effected.
- Extension of Tax exemption to investee Company of Real Estate Investment Trust (REIT)
The Income Tax Act exempts a REIT from all taxes except for withholding tax on interest and dividends. The Finance Act, 2019 extends the exemption to an investee company of a REIT. An investee company of REIT is a company fully owned or controlled by that REIT. REITS hold property through such companies and its income flows directly to the REIT. This additional incentive effective the 7th of November, 2019 will enable REITs to acquire properties with minimal capital gains tax cost on the part of investors, and therefore will attract more investors to REIT. This will in turn boost growth of REITS in Kenya.
- Capital Gains Tax.
The Finance Bill 2019 proposed to increase Capital Gains Tax rate from 5% to 12.5% in order to align it with that of East African region. The proposal was rejected and the initial rate of 5% retained under the new Act. This is comforting to the property sellers and developers who would have paid more tax on the sale of their property.
- CGT exempt for property transferred in the course of group restructuring/reorganization.
A transfer of property that is necessitated by a transaction involving the incorporation, recapitalization, acquisition, amalgamation, separation, dissolution or similar restructuring of a corporate entity, where such transfer is:
(a) legal or regulatory requirement; (b) as a result of a directive or compulsory acquisition by the government; (c) an internal restructuring within a group which does not involve transfer of property to a third party; or (d) in the public interest and approved by the Cabinet Secretary; is exempted from capital gains tax.
The exemption from the tax encourages business growth and smoothens such entities’ operations. This provision, an amendment to the eight schedule of the Income Tax Act, is effective from the 7th of November, 2019.
- Turnover tax
Turnover tax was repealed by the Finance Act 2018 and replaced with the presumptive tax to persons issued with a single business permit by the county government at 15% of the single business permit fee in order to widen revenue range in the informal sector. The Finance Bill, 2019 proposed to re-introduce turnover tax at 3% for businesses whose turnover does not exceed Kshs 5 million. The Finance Act 2019 retains this proposal. Therefore, as from the 1st of January 2020, Turnover Tax shall be levied simultaneously with Presumptive Tax despite the latter’s low yields and implementation challenges since its introduction.
However, turnover tax shall not apply to rental income; management or professional or training fees; the income of incorporated companies; or any income which is subject to a final withholding tax under the Finance Act, 2019.
Download the pdf version here to read more