Kenya's Supreme Court's Finance Act 2023 Ruling - What It Means For Your Business

The Supreme Court's landmark decision on the Finance Act 2023 has provided a clearer path forward for taxpayers, businesses, and policymakers in Kenya. Although the court overturned the Court of Appeal's judgment that declared the entire Act unconstitutional, it upheld most provisions while establishing guidelines for legislative accountability and public participation in fiscal policy. The ruling affirmed Parliament's authority to legislate on tax matters but mandated a more structured approach to public engagement. Importantly, the court held that further public participation is not required for amendments introduced after initial consultations, as long as they reflect input already gathered. For taxpayers, this means complying with new provisions, such as electronic tax invoicing (eTIMS), increased corporate tax rates for permanent establishments, and taxes on repatriated profits. The Act also brings notable adjustments in VAT, with exported services now zero-rated and petroleum products seeing a VAT increase to 16%. Businesses must update their compliance strategies accordingly to navigate the evolving regulatory terrain.

Here are the key implications for employers, employees, and business people in Kenya:

Employment and Income Tax ??

For Employers:

• Must deduct 1.5% housing levy from employees' gross monthly salary and match it with 1.5% employer contribution ??
• Required to process payroll according to new PAYE rates effective July 1, 2023 ??
• Must ensure compliance with electronic tax invoice (eTIMS) system for expense claims ??

The new rates are:

• 10% for monthly income up to KES 24,000
• 25% for KES 24,001 - 32,333
• 30% for KES 32,334 - 500,000
• 32.5% for KES 500,001 - 800,000
• 35% for income above KES 800,000

This represents a significant change from the previous tax structure (January 2021 to June 2023) which had only three bands:

• 10% for monthly income up to KES 24,000
• 25% for KES 24,001 - 32,333
• 30% for income above KES 32,333

For Employees:

• New tax bands apply with higher rates ??32.5% tax for monthly income between KES 500,000-800,000
• 35% tax for monthly income above KES 800,000
• Housing levy deduction of 1.5% from gross monthly salary is mandatory ???

Business Implications ??

Tax Administration:

• Withholding tax must be remitted by the twentieth of each month ?
• Expenses without electronic tax invoices (eTIMS) will not be tax-deductible ??
• Digital content monetization payments subject to withholding tax ??

Corporate Taxation:

• Permanent establishments face 37.5% corporate tax rate ??
• 15% tax on repatriated profits ??
• Capital gains tax applies to indirect transfers ??
• 3% tax on digital asset transfers and exchanges ??

Special Provisions:

• Special Economic Zone entities retain tax exemptions for: ??
• Property transfers
• Management fees
• Interest payments
• Royalties to non-residents

VAT Changes:

• Exported services are zero-rated ??
• New compliance requirements for tax invoicing and reporting ??

The Supreme Court's ruling provides certainty to the tax environment by upholding most provisions of the Finance Act 2023, while declaring sections 76, 78, 84, and 87 unconstitutional ??