Direct Tax in Kenya – Kenya Taxation System

• Taxation in Kenya
• Types of statutory taxes in Kenya
• Use of the various statutory taxes in Kenya

The tax system in Kenya is governed by the Kenya Revenue Authority (KRA). The covered taxes are Value Added Tax (VAT), income tax, customs duties, withholding tax, and excise duties. The tax system can be modified by independent legislators who are tasked with the job of governing the system. The KRS also has the authority to verify and review the taxes filed by the different entities in the country. The system aims to collect taxes efficiently and limit corruption.

Taxation in Kenya

The KRS is the main administrative body for taxes in Kenya. The tax structure in Kenya can be broadly categorized into:

Direct taxes: The taxes such as income taxes are direct taxes. This is one of the most important taxes that is subdivided into four categories stipulated by the direct tax department. Income tax is charged annually on resident and non-resident Kenyans when the income is derived from or accrued in Kenya.

Income tax is applicable on:

• Trade or professional income
• Income from employment
• Income from rent
• Dividends and interest
• Income from pension
• Income from the digital marketplace
• Income from natural resources etc.
• Indirect taxes: This includes taxes such as VAT, customs duties, excise duties, and other levies

Types of statutory taxes in Kenya

The income taxes in Kenya can be categorized based on the taxable income. They are as follows:

Pay as You Earn (PAYE): This is a method of collecting tax at the source of the income. When people are gainfully employed, their employers deduct the taxes as per the specified rates set by the government and remit them with the KRA. The deduction for a month is to be remitted with KRS before the 9th of the following month.

Corporation tax: Corporate entities such as corporate limited companies, co-operatives, and trusts are taxed on their annual income accrue within Kenya. This is applicable to companies that are based in Kenya, companies based outside of buy operating in Kenya, and companies with a branch in Kenya.

Value Added Tax: Companies and partnerships that supply taxable goods and services must pay VAT as per the requirements of the KRA. These taxable goods and services may be provided in Kenya or imported into Kenya. Any company that has annual revenue in excess of Kshs. 5,000,000 must register for VAT and those with an income less than Kshs. 5,000, 000 can do so if they wish to. KRA appoints agents who withhold and pay VAT on supplies in order to make the process easier. These agents can be verified online via the agent checker on iTax.

Imported and exported services: Most of Kenya's exported services are zero-rated, meaning they do not have to be charged VAT. But imported services are linked to registered individuals, and the tax is calculated as if the person has supplied the taxable item to himself. Reverse VAT may also be payable when the registered individual does not get an entitlement to a credit facility for a portion of the input payable tax.

Custom and excise duty: The increase in manufacturing activities, as well as the development of the Kenyan oil and natural gas industries have increased Kenya’s international trade. The two acts that govern customs and central excise are:

• Custom and Excise Act 2010
• East African Community Customs Management Act 2004

The Customs Cap 472 governs excise duties, but there may soon be more current legislation for excise duties. The Kenyan excise duties are applicable on certain imported and locally manufactured goods. Excise duty is also applicable to select services under the Fifth Schedule of the Customs and Excise Act. A few examples of such goods are:

• Bottles water
• Wine, juices, soft drinks
• Cigarettes
• Cosmetics and hair cosmetics
• Opaque beer and other beer made from malt
• Mobile cellular phone services
• Money transfer fees

Custom duties: The custom duties are charged as import declaration fee, VAT, excise duty, and railway development. The Kenyan customs duties charge the importer of the chargeable goods at the point of import. It is the responsibility of the importer to accurately calculate and pay the taxes as per the government norms.

Withholding tax: The withholding taxes is the tax that is charged on pension, royalties, interest, dividends, management fees, rent received by non-residents, performance fees, commissions, etc. It is calculated based on the resident status of the person being taxed. It is also deductible at the point of payment to persons who are not employees. The partnerships and companies that are to pay the tax to deduct it and pay it to the Commissioner of Domestic Taxes.

Advance tax: Before a commercial vehicle or a public service vehicle, or a commercial vehicle is presented for the annual inspection, the advance tax must be paid. It is a direct tax that is essential for the registration of commercial vehicles.

Residential rental income tax: The income received from rent for a property is taxable based on whether it is being used for residential or commercial purposes. The tax is calculated as per the government norms and based on the amount of rent received. Agents appointed by the KRA withhold and pay a percentage of the gross rent as tax, and you can verify these agents online via the agent checker on iTax.

Penalty: If there has been a non-payment or delayed payment of taxes, a penalty of 2 percent per month compounded for the non-paid period of tax is chargeable.

Transfer pricing: Kenya has implemented many reforms and measures to make the country attractive to foreign investors and multinational organizations looking to enter the East African market. Though there is more complexity in the taxing structure, the KRA is attempting to make the entire tax structure more transparent, straightforward, and free of malpractices. There are special laws that govern the working and operations of corporations in the country. The Companies Act governs the process and requirements of registering a company in Kenya. A private company must have a minimum of two shareholders and a public organization a minimum of 50 shareholders. Foreign companies are allowed to register and operate as an organization or a branch. The branch or a Permanent Establishment (PE) of a foreign company is a separate and distinct legal entity from other branches, other PEs, and head office. The arm’s length principle is applied for transfer pricing in the country.

Use of the various statutory taxes in Kenya

Taxes are necessary for a country to fund its growth, operation, and other facets of providing the best to its citizens. Some of the uses of the Kenyan statutory taxes are:

Revenue: The money that is earned through taxes is used to fund the improvement of the lives of Kenyan citizens. It is used for social welfare, infrastructure development and to pay off the government’s debts

Externalities: An industrial or commercial activity affects a third party, and the government uses taxes to discourage negative externalities such as pollution

Reprising: The repricing of goods such as alcohol and tobacco

Representation: To properly enforce, manage and collect taxes

Read More:

• KRA VAT Return
• Kenya VAT Guide