TAXATION
Tax Telescope Into 2021
By CPA Nicholas Gachara
2020 will be remembered in bad taste as the year of pandemic . Many businesses were adversely affected which had the ripple effect to the family as a unit of the society . Governments worldwide have been forced to make adjustments including our very own . Among measures taken were reduction of Value Added Tax from 16 % to 14 % and Scrapping of the 30 % tax bracket in the Pay As You Earn ( PAYE ). This effectively put more money into consumers ’ pockets . As the year ends , we have to look into what 2021 holds using the Tax Telescope . These tax measures were highlighted in the 2020 / 2021 budget presented by the Cabinet Secretary for the National Treasury , Ukur Yattani .
Rental Income : The maximum income threshold subject to residential rental income is to be increased from KES 10m to KES 15m ( Effective 1 January 2021 ). This means that landlords who earn 15m per year , shall enjoy the benefit of Residential rental income tax , which is a simplified regime . This is applied at the rate of 10 % on the gross rental receipts of a resident person in respect of residential property . The tax is payable on a monthly basis . This shift works well for the tax man as more land lords can be put into the bracket increasing expected tax remittances . However , it disadvantages the Landlord as he is denied on claiming expenses directly attributed to running his houses . However , on written application and approval therefore , the landlord can opt to claiming expenses and paying the applicable corporation tax rate .
Minimum Tax : A new tax known as “ minimum tax ” is to be introduced with effect from 1 January 2021 . Every business shall be required to pay 1 % of yearly earnings . This is meant to capture companies who are in perpetual losses to contribute to the tax remittances . In Kenya , losses can be carried forward for 10 years . Some companies usually use this to escape paying taxes . The minimum tax will work well for the government as tax revenues would increase through bringing more businesses into the contributing force . The tax will be payable quarterly in equal instalments . However , if instalment tax is higher than minimum tax , then the business would pay only instalment tax . Other cases where minimum tax is not payable are : On exempt incomes from tax under the Income Tax Act . For example , income of county governments ; On employment income . For example salaries ; On residential rental income . For examples landlords shall not be subjected to minimum tax ; and On capital gains . For example profits from stocks and bonds .
Digital Service Tax : A “ digital service tax ” is to be introduced with effect from 1 January 2021 . The tax shall be applicable to transactions resulting from online services in Kenya . This implies that ‘ YouTubers ” and everyone earning incomes through their internet activities such as blogs and product review sites shall be liable to pay a tax of 1.5 % for all incomes earned .
Personal Income Tax : Deposits into registered Home Ownership Savings Plan ( HOSPs ) shall no-longer be deductible while ascertaining an individual ’ s taxable income ( Effective 1 January 2021 ). Employees will no longer enjoy the benefits of deducting their yearly deposit which is currently capped at Kes . 96,000 per year . This implies employees will have a higher tax burden due to the denied relief . Interest income earned by a HOSP depositor shall be fully taxable ( Effective 1 January 2021 ). Currently , any interest income earned by a depositor on deposits of up to KES 3 million to a registered HOSP is exempt from tax . This implies that it will become more expensive to take up mortgages and save for purchase of homes .
The following incomes , which are currently exempt from tax , shall become taxable ( with effect from 1 January 2021 ): Monthly or lump sum pension granted to a person who is 65 years of age or more ; Bonuses , overtime and retirement benefits paid to low-income employees ; This will result in reduced personal incomes due to the introduction of the above which were previously exempt .
Value Added Tax ( VAT ): Input tax to be claimable by the purchaser only if the supplier has declared the same in the VAT return . This measure will give legal force to the recently introduced VAT autoassessment practice . This implies that suppliers and buyers will have to ensure they coordinate their VAT filings to ensure that both sides of the transactions are well captured , in order for claims to be accepted . In a nutshell , the buyer and the seller will have to file their VAT returns during the same period , for example , November 2020 , to enable matching of transactions in the iTax system . This will reduce cases of fraud and enable easier reconciliation through matching of transactions .
Tax Amnesty Program : A tax amnesty program is to take effect from 1 January 2021 . The amnesty is expected to run for 3 years and shall apply to tax liabilities that accrued within a period of five years prior to 1 July 2020 . A taxpayer who voluntarily discloses to the Kenya Revenue Authority their tax liabilities ( including material facts ) will be granted relief from penalties and interest on the tax disclosed . This amnesty program is geared towards forgiving tax cheats , as they commit themselves to fulfil their tax obligations , going forward .
This is to encourage production of the above goods as by making removing taxes on importation of raw materials . Business people will be able to claim input VAT thus making investment in these sectors more attractive .
In conclusion , as the country is economically ravaged by the Covid-19 pandemic , the government must grapple with the delicate balance of raising more revenues , while at the same time , striving to cushion the multitudes that have been rendered unemployed during these times of global crisis . Though measures such as introduction of tax amnesty programs may encourage evaders to duly remit their returns , taxing of pensions will greatly disadvantage vulnerable retirees .
CPA Nicholas Gachara is a Tax and Accounting Consultant . You can commune with him on this or related matters via email at : Nicholasgachara @ gmail . com .
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