The Finance Bill 2024, proposed by President William Ruto’s administration, aims to fund a Sh3.914 trillion budget by collecting Sh3.354 trillion in taxes. This ambitious target includes several new and revised tax measures that will significantly impact both individuals and businesses in Kenya. Here are the key highlights and implications of the proposed changes:
Key Tax Proposals and Their Implications
1. Motor Vehicle Tax
- New Tax: A 2.5% tax on the value of motor vehicles, with a minimum of Sh5,000 and a maximum of Sh100,000, collected at the point of insurance issuance.
- Implications: This tax will increase the cost of vehicle ownership and could lead to higher insurance premiums. It is expected to affect the transport and logistics industry, potentially escalating the cost of living through a multiplier effect.
2. Value Added Tax (VAT)
- Changes: The VAT registration threshold will increase from Sh5 million to Sh8 million. Additionally, the supply of ordinary bread will be reclassified from zero-rated to standard-rated, increasing its price.
- Implications: Small businesses with turnovers between Sh5 million and Sh8 million will no longer need to register for VAT, reducing their administrative burden. However, the reclassification of bread will raise the cost of this staple food, impacting many households.
3. Significant Economic Presence Tax (SEPT)
- New Tax: Replaces the Digital Service Tax (DST) with a 30% tax on the taxable profit of non-resident digital service providers, calculated as 20% of gross turnover.
- Implications: This change will significantly increase the tax burden on digital service providers from 1.5% under DST to an effective rate of 6%. It may discourage digital businesses from operating in Kenya, potentially stifling growth in the digital economy.
4. Capital Gains Tax (CGT)
- Reduction: The CGT rate will be reduced from 15% to 5% for investments certified by the Nairobi International Financial Centre Authority, provided the investment is at least Sh3 billion and held for at least five years.
- Implications: This reduction aims to attract foreign direct investment by making Kenya a more attractive destination for large-scale investors.
5. Withholding Tax on Digital Marketplaces
- New Tax: A withholding tax of 20% for non-residents and 5% for residents on income derived from digital marketplaces.
- Implications: This will increase tax compliance costs for digital marketplace operators and could lead to higher prices for consumers as businesses pass on the tax burden.
6. Excise Duty
- Increase: Excise duty on money transfer services will rise from 15% to 20%.
- Implications: This will increase the cost of financial transactions, affecting both businesses and individuals who rely on these services for daily operations.
7. Investment Allowances and Tax Incentives
- Changes: Spectrum licenses will now be eligible for a 10% capital allowance per year. The investment allowance on bulk storage facilities will be reduced from 150% to 10% per annum.
- Implications: These changes will provide some relief to telecommunication operators but reduce incentives for large-scale storage facility investments, potentially affecting infrastructure development.
The Finance Bill 2024 introduces several measures aimed at increasing tax revenue but also poses significant challenges:
- Increased Cost of Living: The reclassification of essential goods like bread to standard-rated VAT will directly impact household expenses.
- Business Compliance Burden: New taxes and increased rates will require businesses to adjust their financial strategies and compliance processes, potentially increasing operational costs.
- Investment Climate: While some measures aim to attract foreign investment, others, like the SEPT and increased excise duties, may deter digital and financial service providers from operating in Kenya.
Overall, the Finance Bill 2024 represents a comprehensive effort to widen the tax base and increase government revenue but comes with significant implications for economic activity and the cost of living in Kenya.
