Highlights of the Finance Act, 2018

Introduction

On 21st September 2018, the President of Kenya assented to the Finance Act, No. 10 of 2018 after a lengthy legislative process. This was preceded by the President initially exercising his powers under Article 115(1)(b) of the Constitution of Kenya, 2010 to reject an earlier version that had been approved by the National Assembly. As a result, the Finance Act as assented incorporates the contents of the President’s proposals as per the Memorandum to the National Assembly rejecting the initial version of the Finance Bill.

Below, we highlight some of the key changes introduced by the Finance Act, 2018. In doing so, we review the key provisions introduced through the President’s Memorandum and then followed by key changes that were earlier approved by the National Assembly.

Affordable Housing Levy

The Finance Act 2018 contains a 1.5% contribution by every employee from their monthly basic salary, with a matched contribution by the employer, with a maximum contribution of Kshs. 5,000/- monthly. It will be the employer’s duty to remit both sets of contributions, by the 9th day of the following month.

The President’s Memorandum introduced clarity to this provision where contributions will now be channelled to the Housing Fund established under the Housing Act, Cap. 117. Employees will be able to claim these contributed funds to finance the purchase of affordable housing if they qualify to do so. If not, the funds may be transferred to a pension scheme, another beneficiary or cashed out after fifteen years of contribution or retirement, whichever is earlier.

It is noted that this tax will however not come into effect until regulations governing it are gazetted by the relevant Cabinet Secretary. The progress on formulating these regulations is at the moment uncertain.

Changes in Taxes

Download file attached.

We note that the above excise duty rates have been deemed to have come into operation on 1st July 2018. This excise duty shall be levied on the charges levied for rendering the service, apart from that on telephone and internet data services where it will be charged on the open market value of the same.

Further, the anti-adulteration levy on kerosene, which is to come into effect on 1st October 2018, is in addition

to the new VAT rate applicable on petroleum products. We note that the Committee on Finance and National Planning supported the adoption of the increased excise duty on money transfer as an alternative to the initially proposed Robin-Hood tax on financial transfers that would have been cumbersome to calculate.

Other key changes introduced by the Finance Act, 2018 are as follows:

The lower cap on interest payable upon bank deposits was removed, but the upper limit of 4% above the Central Bank Rate payable on bank loans was retained.

An annual presumptive tax has been introduced on persons whose turnover does not exceed Kshs. 5 million per year, and will be payable upon renewal of business permits or trade licences. This takes effect on 1st January 2019 and will be equal to 15% of the business permit or trade licence fee issued by a County government.

The Tax Procedures Act, No. 20 of 2015, has introduced a penalty for late payment of tax to 20%.

Banks and financial institutions are now mandatorily required to maintain a register of the next of kin for each customer, and update the same annually. Failure to do so incurs a Kshs. 1 million penalty.

Unconstitutionality of the Provisional Collection of Taxes

On 19th September 2018, the High Court in Nairobi gave its judgment in Petition 253 of 2018, Okiya Omtatah vs Cabinet Secretary, National Treasury & 3 Others. It thus declared the Provisional Collection of Taxes and Duties Act, Cap. 415 and the Provisional Collection of Taxes and Duties Order, 2018 to be unconstitutional.

Accordingly, the provisional collection of various taxes such as the intended Robin-Hood taxes on financial transfers was declared illegal given that the Finance Bill, 2018 was at the time still being deliberated by the National Assembly.

The Court did not make a specific order as to how provisionally collected taxes should be treated. However, given the illegality of the imposition of these taxes, it would be advisable to refund taxes collected back to the taxpayers from whom they have been collected, where this is feasible. The same taxes are not payable to the Kenya Revenue Authority, given that they were levied based on an illegality as determined by the High Court. We are, nonetheless, aware that the National Treasury has expressed intention of lodging an appeal against this judgment.

MMC Africa Law shall always do its best to inform you of important developments in relation to the law and how such developments may impact on you. We trust that you will find this alert informative and useful.

Important Legal Notice: The contents of this alert are intended for general use only and should not be relied upon without seeking specific legal advice on any matter.