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The Kenya national budget was read on March 30, 2017, instead of the traditional mid-June reading. The budget is for the twelve (12) months in the fiscal year 2017/2018 from 1^st July 2017 to 30^th June 2018.

However, some of the budget change proposals take effect immediately, starting from January 1, 2017.

Kenya through the National Treasury, read her budget without the other four EAC countries, which will be read in mid-June 2017.

This post was written and published after the 2017 National Budget – here for historical purposes only.

The total budget is for Kshs 2,287.9 billion (26.3% of GDP). It is important to note that the budget proposals are introduced through the Finance Bill 2017. The Finance Bill 2017 will need to be presented to Parliament for approval.

With or without adjustments, it will then be forwarded to the president for assent, after which it becomes an act of parliament, hence a law. However, some of the budget proposals will take effect immediately, while others will take effect from June 2017.

The budget spread

1. Expenditures for the fiscal year.
2. Revenue for the fiscal year.
3. Budget deficit for the fiscal year.
4. Budget deficit cover for the fiscal year.

Why budget speech in March?

Departing from the traditional June budget reading, the Cabinet Secretary explained that this was to allow Members of Parliament sufficient time to approve the Appropriation Bill on time and focus on the general election to be held on 8^th August 2018.

A budget reading in June would mean that the Appropriation Bill would not be approved since all members of Parliament will be out campaigning to defend their parliamentary seats.

Proposed budget balancing

Any budget is about revenue and expenditure. The government expected revenue and expected expenditures.

Revenue projections

In the fiscal year 2017/18, the government expects ordinary revenue of Kshs 1,549.4 billion.

Expenditure projections

The government expects recurrent and development expenditures. The following are the anticipated expenditures in the fiscal year.

Recurrent expenditure                                    – kshs 1,347.3 billion (15% GDP)

Development expenditure                              – kshs 640.3 billion (7.4% GDP)

Contingency (unforeseen expenditures)    – kshs 5 billion

Total                                                                    – kshs 1,992.6 billion

Budget deficit

The budget deficit is the difference between the expected expenditures and the expected revenues. Therefore, the budget deficit for the fiscal year is kshs 524.6 billion (6% GDP.

Budget deficit financing

The government can source the funds to finance the budget deficit from the international or domestic markets. The following are the sources of financing for the budget deficit.

External financing – kshs 256 billion (2.9% GDP)

Internal financing – kshs 268.6 billion (3.1%)

Total                     – kshs 524.6 billion (6% GDP)

Note

One important thing to note is that since internal financing exceeds external financing, a greater portion of the budget’s interest will remain in the country. However, heavy domestic borrowing by the government means that the government will be competing with domestic borrowers. Banks, being risk-averse, will prefer to lend the money to the government, where the risk is lower.

Additionally, some Kenyans may prefer to lend money to the government, as the current interest rate of 10% is higher than the rate charged by controlled commercial banks, which is 8%. Direct government participation in the domestic money market may have adverse effects on the financial sector and the economy as a whole.

Proposed Taxation Measures in Finance Bill 2017

The taxation measures in the Finance Bill 2017 are based on the Tax Procedures Act (2015), Income Tax Act (Cap 470), VAT Act (2013), Customs and Excise Act (Cap 472), and Excise Act (Cap 131), as well as the Betting, Lottery, Gaming, and Competition Act.

However, not all proposals for the Customs and Excise Act were captured, as some measures will be released simultaneously for uniformity with other EAC countries (Burundi, Tanzania, Uganda, Kenya, and Rwanda). Releasing the measures beforehand would not have been good practice.

Apart from Kenya, the other EAC countries will read their budgets on the traditional date in mid-June. The remaining Customs and Excise measures, according to the EAC Customs Management Act (2005) [with subsequent amendments in 2011 and 2012], will be included in mid-June 2017.

Consequently, some customs measures will be delayed till the EAC Ministers of Finance meeting in mid-year. The deliberations and agreements reached in the meeting will be communicated to EAC members through the EAC Gazette. Thereafter, the implementation will commence from 1^st July 2017.

However, proposals were made in the Finance Bill 2017 regarding income tax, Value–added tax, domestic excise duty, certain customs and Excise, and Betting, lottery, gaming, and competition. The following are some of the proposals that have been made.

Amendments to the Tax Procedures Act (2015)

There were several measures proposed

Amnesty

To enjoy amnesty declared on foreign investments, the taxpayers must do the following by 30th June 2018:

1. Declare income for the year 2016.
2. File tax returns for the year 2016.
3. File accounts for the year 2016.
4. Transfer back to Kenya the funds voluntarily declared under the amnesty.

Amendments to the Income Tax Act Cap 470

Several proposals were made for personal income tax (PAYE) and corporate tax to be implemented by the tax commissioner. For individual taxes, there were proposals for employment income and pension withdrawals.

Employment income

a. Tax bands were increased by 10 % from the current rates. The following are the new tax bands.

The first               kshs 147,580            10 %

The next              kshs 130,043            15 %

The next              kshs 130,043            20 %

The next              kshs 130,043           15 %

Income above  kshs 564,709           30 %

b. Personal relief was increased by 10 % to ksh 16,896 per annum.

c. The PAYE tax bands and personal relief changes are effective from 1^st January 2017.

Pension withdrawals

a. The tax bands for pension withdrawals have been harmonized with PAYE tax bands as follows:

The first                kshs 147,580          10 %

The next              kshs 130,043            15 %

The next              kshs 130,043            20 %

The next              kshs 130,043            15 %

Income above     kshs 564,709        30 %

b. Application of the new tax bands is effective 1st January 2017.

Corporate tax

Several income tax proposals were made. The following is a list of the income tax proposals.

Vehicle assemblers

1. New assemblers of motor vehicles will pay income tax at a rate of 15%, instead of the current normal corporate income tax rate of 30%.
2. The 15% rate is applicable for the first 5 years after the commencement of business operations in Kenya. Businesses like Peugeot will benefit from this.
3. The tax rates commence on 1^st January 2017.

100 % investment deduction for businesses in Special Economic Zones

1. Business enterprises operating in the Special Economic Zones (SEZs) are allowed to deduct 100% of their investment costs for building construction, machinery purchase, and machinery installation.
2. The investment deduction will be in the first year of utilization.
3. The investment deduction is effective as of January 1, 2017.

Withholding tax on dividends from Special Economic Zones Businesses to non-residents

1. Dividends from business enterprises operating from Special Economic Zones (SEZ) to non-residents are now exempted from withholding tax.
2. The proposal takes effect on January 1, 2017.

Withholding tax rates for Special Economic Zones Businesses

1. There was a proposal to reduce the withholding tax rates for businesses in SEZs as follows:
2. Management and professional fees – from 20% to 5%.
3. Interest rates range from 15% to 5%.
4. Royalty – from 20 % to 5 %.
5. The effective date is 1^st January 2017.

Investment deductions in the blue economy

1. The blue economy will enjoy a 150% investment deduction allowance for capital expenditure. The blue economy is economic activity in the maritime sector.
2. The effective date is 1st January 2017.

Donations as allowable deductions

1. Tax deduction of expenditure incurred on donations for the alleviation of distress during natural disasters declared by the President.
2. However, donations must be channeled through the Kenya Red Cross, county governments, or any other organization responsible for managing natural disasters in Kenya.
3. The effective date is 1st January 2017.

Exemption of Islamic Finance Products

1. Islamic finance products will be subject to equivalent tax treatment as conventional financial products under the Capital Markets Act and the Public Finance Management Act.
2. The transactions are for lending or borrowing (returns)
3. Transactions of Islamic Finance products are exempted from VAT.
4. The effective date is 1st January 2017.

Amendments to the Value-Added Tax Act

There were proposals on Value-Added Tax (VAT). The following five VAT proposals were made in the 2017/18 budget.

Exemption of supplies for the disabled

1. Supplies educational, scientific, or cultural advancement to organizations exempted by the national Government.
2. The effective date for the VAT changes is 3rd April 2017.

Exemption of supply of Liquefied Petroleum Gas

1. The supply of liquefied petroleum gas (LPG) is exempt from VAT.
2. The effective date for the VAT changes is 3rd April 2017.

Exemption of inputs for the manufacture of pesticides  

1. All inputs used for the local manufacture of pesticides will be exempt from VAT.
2. However, this is subject to the Minister for Agriculture’s recommendations.
3. The effective date for the VAT changes is 3rd April 2017.

Exemption from the purchase and assembly of tourist motor vehicles  

1. The local assembly and purchase of motor vehicles for conversion into tourist vehicles will be exempt from VAT.
2. The effective date for the VAT changes is 3rd April 2017.

Exemption of medical equipment and apparatus in Specialized hospitals  

1. Medical equipment and apparatus used in Specialized hospitals will be VAT exempt. This is a follow-up to the earlier exemption of material subject to VAT for the construction of the hospitals.
2. The effective date is 3^rd April 2017.

Exemption of civil aviation spare parts

1. All aircraft spare parts imported by aircraft operators or persons in the business of maintaining aircraft are exempt from VAT, subject to recommendations by the authority responsible for Civil Aviation.
2. The effective date for the VAT changes is 3rd April 2017.

Exemption from the manufacture of LPG Cylinders  

1. The local manufacture of LPG cylinders is VAT exempt effective 3^rd April 2017.
2. The effective date for the VAT changes is 3rd April 2017.

Exemption of Islamic Finance Products

1. Islamic finance products will be subject to equivalent tax treatment as conventional financial products under the Capital Markets Act and the Public Finance Management Act.
2. Transactions of Islamic Finance products are exempted from VAT.
3. The effective date for the VAT changes is 3rd April 2017.

Exemption of Transfer of Assets

1. Transfer of assets into Real Estate Investment Trusts (REITS) and Asset-backed Securities (ABS) is tax-exempt effective 3^rd April 2017.
2. The effective date for the VAT changes is 3rd April 2017.

Zero rating ordinary bread and maize flour

1. Bread and maize flour to be zero (0) rated.
2. The effective date for the VAT changes is 3rd April 2017.

Zero rating of supplies to marine fisheries and fish processors 

1. The Blue Economy will be subject to VAT zero rating on supplies to marine fisheries and fish processors, including packaging materials and other inputs that support primary, secondary, and ancillary marine fisheries and fish processing activities.
2. The effective date for the VAT changes is 3rd April 2017.

Zero rating of supplies to international and regional organizations

1. Zero rating supply of goods and services to international and regional organizations with host country and/or bilateral agreements with Kenya.
2. The effective date for the VAT changes is 3rd April 2017.

Zero rating of supplies to the National Red Cross Society and St John Ambulance

1. Supplies of goods and services to the National Red Cross Society and St John Ambulance are now zero-rated for VAT.
2. The effective date for the VAT changes is 3rd April 2017.

Amendment of the Excise Duty Act

Several proposals were made under the domestic excise tax.

Cost of Excisable Stamps

1. Under the Excisable Goods Management System (EGMS), the cost of stamps to be affixed on the goods will range from kshs 0.5 to kshs 2.5.
2. The effective date is indicated in the act.

Remission of excise duty on locally manufactured beer

1. There will be an 80 % remission on excise duty in respect of locally manufactured beer.
2. However, the beer must be from locally produced sorghum, millet, cassava, or any other products, but excludes beer made from barley.
3. The effective date is indicated in the act.

Excise duty on cigarettes

1. Excise duty on cigarettes with filters will be kshs 2,500 per mille, while cigarettes without filters will be kshs 1,800 per mille.
2. The effective date is indicated in the act.

Tax rate on spirits

1. The tax rate on spirits has been increased from Kshs 175 per liter to Kshs 200 per liter.
2. The effective date is indicated in the act.

Amendment of the Customs and Excise Act

Although not all proposals under Customs were made, several were submitted. The following four proposals were made:

Illuminating kerosene

1. There will be a refund of excise duty on illuminating kerosene for the manufacture of paints and resin by registered manufacturers in Kenya.
2. The effective date is indicated in the act.

Miscellaneous Fees and Levies Act

1. The Miscellaneous Fees and Levies Act will be amended to exempt from export duty and import duty goods declared for export to and import by business enterprises operating at the Special Economic Zones under the SEZ Act.
2. The effective date is indicated in the act.

Importation of Maize

1. Maize will be imported tax-free for the next four months following the budget reading in March.
2. The effective date is indicated in the act.

Importation of Dates  

1. Dates to be imported tax-free during the month of Ramadhan.
2. The effective date is indicated in the act.

Port charges for fisheries vessels

1. There will be a 50 % reduction in port charges for fisheries vessels.
2. The effective date is indicated in the act.

Amendment of the Betting, lotteries, gaming, and competition Act

1. There are proposals to increase the tax on betting, lotteries, gaming, and competition to 50 % of all the winnings across all
2. The effective date is indicated in the act.

Disclaimer

This post provides a general overview and guidance and should not be considered professional advice. Consequently, www.taxkenya.com, its directors, employees, agents, and associates do not take any responsibility for the results of any action taken based on the information in this post or for any errors or omissions. Kenyan taxpayers must always rely on the information from KRA.

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