Kenya Tax Guide -types of statutory taxes | Tax Firm Kenya (2024)

Taxation in Kenya

All That You Need To Know About Taxation in Kenya

In the words of CalvinCoolidgu“collectingmore taxes than isabsolutely necessary is legalized robbery” But nonetheless,asresponsible citizens, we pay taxes, perhaps sometimes morethan we consider necessary.In that light, the statutory taxes inKenya can be focused upon.

Any tax or duty payable to the Kenya Revenue Authority (except VAT and duty on imports) may be offset on request against any refund of tax or duty confirmed by the Authority. The request must be made 30 days prior to the tax due date. Tax paid in another country on employment income by a Kenyan citizen can be offset against tax payable on that income in Kenya to the maximum of tax payable in Kenya on the said income.

Types of Statutory Taxes In Kenya

Theorganizationvested with the right of collecting, assessing andaccounting for taxes in Kenya is called the Kenya RevenueAuthority. Taxes in Kenya are categorised under twomain heads, direct and indirect taxes.The indirect statutory taxesin Kenya applies whenthe purchaseof goods are made. Thevarioustaxes under this banner are excise duty,customduty & leviesand V.A.T. On the other hand, income tax falls under thedirect taxes in Kenya.

The direct tax department deals with the collectionandassessmentof income taxes, which happens to be one of theimportant statutory taxes in Kenya. The income tax isfurtherdividedinto four subcategories, for the easy comprehensionof the massive structure ofstatutory taxes in Kenya.They are as follows:

Pay as You Earn (PAYE)

PAYE is one of the many statutorytaxes in Kenya collected fromindividualsengaged in gainfulemployment. Under this, the employers make a deduction of aparticular percentage from the salary. This percentageisforwardedto the KRA on a per month. Ofthe many statutory taxes in Kenya, PAYE applies to bonuses,director’s fees, commission, weekly wages, monthly and annualsalaries. A personal relief, that is a tax credit is provided toevery resident employee under PAYE.Inaddition to thatinsurance relief and mortgage interest deductions are alsoprovided toqualifying employees.

Corporation Tax:

Yet another of the many taxes inKenya is the Corporation Tax. Under this tax, the companies operating in the country pay a chargeon their total income to the KRA. Theindigenouscompanieshave to pay a change of 30percentwhile branches of non-resident companies are charged 37.5% on their taxable profits.

Value Added Tax:

This is the most popular of the manystatutory taxes in Kenya. According to this regulation in Kenya,VAT is a consumption charge which is imposed on any taxablegoods and services. The consumer who makes a purchase of aservice ora commodity is bound to pay the VAT.

Imported and Exported Services:

Usually, the exported servicesare zero-rated and thus do not come under the preview of theVAT. On the other hand imported services are issued toregistered individuals. It is assumed that the individual hasmade a taxable supply to himself. In other cases REVERSE VATis payable only when a registered individual is not entitled to acredit facility for a part of the input payable tax.

Custom and Excise Duty:

International trade is on the rise forsome time in Kenya. This is largely due to the currentdevelopment in the oil and gas industry. This has been boostedby the expansion of the manufacturing entities in the country.The custom and excise duties are administered under the headsof two acts in Kenya. They are the Custom and Excise Act 2010and the East African Community Customs Management Act2004. Excise duty in Kenya is managed under the Customs Cap472 which came to force in 1978.

However, there might be a change in that end and a newautonomous excise duty act for the administration of Excise dutyin Kenya might be enacted. In general excise duty is imposedon certain imported goods and a few locally manufactured ones.In addition to that, excise duty is also levied on certain serviceswhich fall under the Fifth Schedule of the Customs and ExciseAct. Some goods which incur excise duty include wine, bottledwater, soft drinks and cigarettes.

Custom Duties:

These include import duties such as excise duty,VAT, import declaration fee and railway development. Customerduties are charged to the importer of the goods at the point ofthe importation. The importers are required to accuratelycompute and pay the taxes based on the applicable charges. Generally, when goods are imported VAT, import duty, exciseduty, import declaration fee, railway development fee, rawmaterial, intermediate goods and finished goods are applied.

Withholding Tax

These are one of the many taxes inKenya and ischargedon interests, dividends, pensions,performance fees, royalties, commissions and so on. However,the rates of the taxes collected are not fixed. They varyaccording to the status of the payer. That is whetherornothe/she is a resident.

Advance Tax

This is yet another form of a direct tax that fallsunder the category of the statutory taxes in Kenya. These taxesare directed towards the public service vehicles andcommercial vehicles. The owners are expected to pay thetaxes in advance before they can get their commercial vehiclesregistered.

Residential Rental Income Tax

This isone of the property taxesof the many statutory taxes in Kenya. The Residential RentalIncome Tax is one of the multiple property taxes which fall under the income tax umbrella. The Finance Act of 2015 definesthis tax as the amount to be paid for the accrued incomescollected from theresidentialproperties of Kenya. However, theamount should not be over than Kshs 10 million per income year.

Penalty

Non-payment or delayed payment of taxes comeshand-tied with a penalty of 2percentper month compoundedfor thenonpaid period of tax

Transfer Pricing

Kenya attracts a lot of foreign investmentsparticularly from the multinational organizations which arewilling to make an entry in the East African market. This has ledto a heightened level of complication in the taxing structure. Toensure that the multinational companies continue to invest inthe country and contribute a fair share of tax, the KRA hasconcentrated efforts to cut down and obstruct accountingmalpractices which results in reduced tax liabilities.

In addition to the already mentioned statutory taxes in Kenya, afew more laws focus on corporate entities. There are a few rulesand regulations which guides the operations of the variouscorporate entities of Kenya. An organization which aims to conductbusiness in the country can either operate as a company or abranch. All the corporate entities are guided by the Companies Act.A person wishing to establish a corporate entity in the country mustsubmit the necessary documentation such as memorandum, detailsof directors and shareholders and such.

Under the Companies Act of Kenya, a private company requires aminimum of two shareholders whereas a public organization musthave a minimum of 50 shareholders. Additionally, foreigncompanies can either work as an organization or a branch.

The Companies Act of Kenya also entails the responsibility of theRegistrar of the company. The former is held responsible forregistering incorporated trusts and business names.

While dealing with the corporate entities of the country, there arecertain sector-specific rules to be followed. Companies operating incertain sectors or industries may be expected to obtain certain additional licenses from relevant operating bodies. For example, thevarious banks of the country fall under the jurisdiction of the Central Bank of Kenya directed by the Banking Act. In addition tothat, the Capital Markets Authority is charged with theresponsibility of issuance of shares to the public.

Related: Redefinition of Preferential Tax Regime

Use of The Various Statutory Taxes In Kenya

• Revenue Generation:The citizen and the government togethercan collect money which can further be spent to improve thelives of many. In addition to that, the money can be made useof to cater to any other need of the government. A large part ofthe collected statutory taxes in Kenyais spendon social welfareand infrastructure development.Additionally, a part is spent onmeeting the debts incurred by the government.
• Addressing Externalities:Externality generally refers to aconsequence of an industrial or commercial activity which affectsa third party. For example pollution. Thus in a pursuit todiscourage negative externalities, the government uses tax.
• The Act of Reprising:The various statutory taxes in Kenya isused to reprise wrongly priced goods such as alcohol andtobacco.
• Representation:Under this, people choose their government toensure steady management of tax collection.

History of Taxes In Kenya

The statutory tax measures of Kenya dates back to the pre-colonial era. This was a time when people paid tithes to trade with tribes in different territories. At that time the primary traders were the Portuguese and the Arabs. The taxing structure of that time was fashioned after the Islamic laws and the then trade rules. Under the established taxing structure the locals and the resident had to pay Sadaqa, ji*zya and zakat. This three were mimicked from the Islamic laws. In addition to that harbour fees, capitation tax and such had to be paid. The taxpayers from that time were under two categories, Muslim followers and account holders.

With the advent of the British in the East African Protectorate,including Kenya, the taxation system went through certainmodifications. Few parts of the Arab and Portuguese taxation lawswere included and a new structure was built. The new system hadthe following changes incorporated:

• Hut and Poll Tax: A tax to be paid by locals through labour,money, grains or life stocks.
• Land Taxes
• Income Tax
• Graduated Personal Tax

When Kenya gained independence, the statutory tax structure included trade, income and excise duty. The first ten years of the independence were spent on developing a sound taxation structure. By the year 1973, sales tax was made a part of the taxation system. However, the government had to go through certain rough patches due to the oil crises for which fiscal reforms were introduced. Around the same time, the government launched a 10percentwithholding tax and a 10percentcuts on goods thatwere under the duty-free category.

With the fall of the EAC in 1977, the sales tax were increased to15percent, excise duty to 59percentby theKenyangovernment.Inthe year 2000, the government set a benchmark of collecting24percentof the GDP as taxes. Thus the consumption aspect wasfocused upon. As a result, progressive income tax becameoperative. Individuals with low-income group paid10percentwhereas the high-income group were charged65percent. In addition to that, the income tax of local companieswas set at 45percentand the taxes for foreign companies were setat 52percent.

Given the dynamic nature of laws, a lot of amendments have beenbrought in by the government since then. Changes have beenbrought in some of the tax laws as well as the rates incurred.

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