Brace yourself for hard economic times as the prices of basic commodities are expected to hike following the rise of Value Added Tax (VAT) on petroleum products from eight percent to 16 percent.

This comes after the Parliament (National Assembly) passed the Finance Bill, 2023 following the third reading which proposed to subject petroleum products excluding liquid petroleum gas (LPG) to a VAT at a standard rate of 16 percent, up from eight percent introduced in 2018. This was after a transition clause that provided for an exemption of VAT for such products for a period of two years expired.

The Finance Bill 2023 which was signed into law by President William Ruto on Monday, allowing its provisions to take effect from July 1, will see petrol pump prices surge by up to Ksh12 per litre.

The move is expected to increase the cost of production, given that fuel is a major input in most businesses. As such the cost of living is expected to rise given that producers will pass the cost to consumers through hike in consumer prices.

On the other hand, the bill has proposed a zero rate of LPG products which make the cost of cooking gas cheaper.

Other proposals are:

1. Introduction of a new contribution to the National Housing Development Fund (NHDF)

Originally, the bill had proposed a three percent deduction from employees’ basic monthly salary with the employer matching the contribution. However, the Parliamentary Finance Committee recommended a downward revision of the rate to 1.5 percent deduction from employees’ basic monthly salary, with the employer matching the contribution.

In addition, the committee proposed the removal of the maximum limit of individual contributions, and the contributors will not access their contributions at the end of the seven years as earlier proposed.

2. Introduction of Withholding Tax (WHT) on payments made in respect of digital content monetisation.

The bill has introduced a 15 percent WHT on collections made by digital content creators, however, the finance committee made an amendment to the clause by capping the WHT at three percent.

The move to introduce the WHT on digital content is attributable to the growing popularity of digital content creation due to increase access to internet, digital marketing and the growing youthful population, allowing the government to widen its tax base.

3. Reduction of the rate of Residential Rental Income Tax

This has been reduced to 7.5 percent from the current 10 percent in a bid to promote compliance of property owners and boost the governments’ revenue collection.

4. Introduction of a five percent withholding tax (WHT) of payments made to residents’ persons or permanent establishments in respect to sales promotions, marketing and services.

This is meant to enhance compliance in the industry by tracking the revenues earned by the respective service providers and enhance compliance.

5. Changes to bands Turnover Tax (ToT)

The bill intends to change the bands for Turnover Tax (ToT) to a range of Ksh500,000 to Ksh25 million from the current Ksh1 million to Ksh50 million. Additionally, the bill proposed to increase the turnover tax to three percent from the current one percent. The move to increase the turnover tax is mainly to increase government’s revenue.

6. Introduction of a new tax for repatriated profits

The new tax is at a rate of 15 percent for repatriated profits for non-residents who do not distribute dividends in Kenya, equivalent to the rate charged on dividend paid to non-residents.

7. Introduction of two new PAYE tax bands

The bill has introduced two new tax bands.

  • Those with a monthly income of between Ksh500,000 and Ksh800,000 will be charged at a rate of 32.5 percent.
  • Those with a monthly income of above Ksh800,000 will be charged at a rate of 35 percent.

The move is aimed at increasing the tax revenue to support the government’s budget. However, majority of Kenyan earn less than Ksh100,000 per month.

8. Repeal of annual inflation adjustment

The annual inflation adjustment will be revoked. Currently, the KRA Commissioner General has the power to adjust the specific rate of excise duty once per year to consider inflation. This is a welcome move since it will provide much-needed certainty for business planning.

9. Introduction of excise duty on imported sugar

The excise duty on imported sugar will be at the rate of Ksh5 per kg. However, this excludes the sugar imported or purchased locally for use in the manufacture of pharmaceutical products.

10. Introduction of excise duty of 15 percent on advertisement on TV, print media, billboards and radio stations on alcoholic beverages, betting, gaming, lotteries and prize competitions.

This is intended to discourage advertisement of the said products based on their negative impact on society.

11. Introduction of excise duty on imported fish

The excise duty on imported fish will be at Ksh100,000 per metric tonne of 10 percent of the value, a move aimed at protecting the local fishing industry.

12. Introduction of a fine or jail term for excise stamps offences

There will be a fine of Ksh5 million or a jail term not exceeding three years upon conviction to offenses relating to excise stamps. This is aimed at curbing illicit trade in excisable goods and encourage compliance that may support revenue collection.

13. Reduction of excise duty on telephone, internet, and fees charged on money transfer services agencies and other financial services.

The excise duty will be reduced to 15 percent from 20 percent. This aims at increasing the affordability of mobile devices and promote accessibility to these services.

14. Removal of VAT for aircraft, parts and engines

This is a government’s initiative to support the aviation sector and improve the profitability of the airlines.