2017 Budget Highlights and Analysis

Key themes of the Budget 2017

Export and Prosper

Local Manufacturing

and Assembling

Grow the Automotive

sector

Lower corporate

tax rates in strategic

areas Invest in Security and Invite investment in

Tourism and Hospitality

Strengthen Healthcare by inviting

FDI

Heavy tax on gambling and

hard liquor

Recognition of Islamic

finance

Nairobi International

Finance Centre

BUDGET 2017 - TAX HIGHLIGHTS – Summary of direction

Unpredictable tax regime

Re-Alignment to Industry

focus

Low tax payer base

Drive to expand the

taxpayer base

Policy moves to strengthen exports andcountry’s flagship industry’s earnings

Tax amnesty implementation guidelines yet tobe clear

I-Tax has eliminated manual interventions inreturn submission and tax payment process whichhas reduced business time on routine taxcompliance

The unified tax law for tax administration,compliance, collection & recovery for all tax lawsin Kenya will boost the doing businessconvenience in Kenya

Rehauled Income Tax Act and VAT Regulationsexpected in 2017

Weak legislation and inefficient tax

administration

Leveraging technology and strenghthened

legislation

Income and Asset Disclosure Scheme – Tax Amnesty • Implementation guidelines not clear: KRA has been directed to issue clear

guidelines and clarify circumstances under which amnesty can be granted

• KRA needs to clarify the difference between “Income Earned outside Kenya”Vis-à-vis “Income Received outside Kenya” in their guidelines to avoidmisinterpretations by taxpayers

• Finance Bill 2017 has extended the timelines for submission of Amnestyreturns to 30 June 2018

• KRA needs to clarify whether the repatriated funds needs to be invested inTax Amnesty Bonds or Defined Deposit plans with Banks with a lock in period

• Clarify timelines for repatriation of funds if the funds are locked up inimmovable properties outside Kenya

• Clarify what are the allowed “application of repatriated funds” in Kenya

Tax Reforms – Big Push to the Automotive sector

• Corporate tax rate @ 15%: Companies engagedin local assembling of motor vehicles will besubject to reduced corporate tax rate at 15% inthe first five years of commencement ofoperations

• Skills and Technology Transfer

• Generate FDI: Local assembly in Kenya byVolkswagen, Peugeot, Ashok Leyland, Toyota,Foton

• Boost employment: Automotive sector is one ofthe largest employers globally. Local assemblyplants will boost local employment levels

w.e.f. 1 January 2018

Tax Reforms – Big Push to the Automotive sector

• Exemption from VAT: Specially designed locallyassembled motor vehicles for transportation oftourists purchased by tour operators uponrecommendation by authority responsible fortourism promotion

• Conditions to be met:

• Vehicle registered and operated by licenseholders

• Used exclusively for transportation of tourists

• Vehicle has the provision for camping, rescue,first aid equipment, luggage compartment,communication fittings

w.e.f. 3 April 2017

Tax Reforms – Export to prosper – Special Economic Zones (SEZs)

• Exemption from dividend tax in respect of dividendspaid to Non-residents by SEZ enterprises,developers and operators

• Investment deduction of 100% of capitalexpenditure incurred for construction of buildingand/or purchase and installation of machinery

• Preferential witholding tax rates on payment to non-residents

Management and professional fees – 5%

Royalty – 5%

Interest – 5%

• Exemption from Export duty and IDF for goodsexported to and imported by SEZ enterprises

Related party transactions with resident persons has to be at arms length

w.e.f. 1 January 2018

Tax Reforms – Buy Kenya Build Kenya – Promote local manufacturing

• VAT exempt on LPG: Supply of LPG has been exemptedfrom VAT. This would push the cost up in short term tomedium term. However, the Finance Bill 2017 hasexempted from VAT, inputs used for manufacture of LPGcylinders by licensed manufacturers. This is meant to pushdown the cost in long term, promote investment in localmanufacturing and safeguard the local manufacturing setups against cheaper imports

• Refund of Excise duty paid on purchase of IlluminatingKerosene which is a critical raw material in manufacture ofPaints and Resins. In order to avail refund, themanufacturers are requires to register as per theprovisions of Excise Duty Act 2015. This move will have apositive impact on the Real estate and Construction sector

• VAT exempt on inputs purchased for manufacture ofpesticides. This will have a positive impact on Agro andHorticulture sector and allow local manufacturers a fairplaying ground

w.e.f. 3 April 2017

Tax Reforms - Handling food inflation • VAT zero-rated on maize (corn) flour and ordinary

bread: This will allow manufacturers to claim VAT oninputs from KRA and pass on the cost benefit toconsumers

• Duty free import of white maize for the next fourmonths

Excise Duty Rates will be Inflation Adjusted from July 2017 which will push cost of

excisable goods up

w.e.f. 3 April 2017

Tax Reforms – VAT Rationalization

• VAT exempt on medical equipments andapparatus: Specialty hospitals with 50 Bed +capacity can avail this benefit upon approval byCS for Health

• VAT exempt on aircraft spare parts imported byaircraft operators and those engaged in aircraftmaintenance services after recommendationfrom authority responsible for civil aviation

• VAT zero-rated for medicaments containingpenicillin or derivatives thereof, with penicillanicacid structure or streptomycin or their derivatives

w.e.f. 3 April 2017

Tax Reforms – Change in Individuals Tax Rates

Tax bands expanded by 10% for second year in row to

compensate for inflation to low income earners

Exemption of tax on bonus, overtime allowance and retirement benefitsfor low income employees to continue: This benefit will be available toemployees whose taxable employment income before bonus and overtimeallowance does not exceed the lowest tax band (i.e. Kshs 12,298)

w.e.f. 1 January 2018

Tax Reforms – Witholding VAT• Provisions of Witholding VAT were codified in 2016 by insertion new Section in the Tax

Procedure Act 2015. A person appointed as Witholding VAT agent is required to withhold6% of taxable value on purchasing taxable supplies at the time of payment of supplies andremit the same to Commissioner

• Cash strapped: Suppliers earning low margin on their products and supplyinggoods to customers, who are appointed as Witholding VAT agents, have feltseverely cash strapped due to 6% of their sales value being withheld and resultingin their inability to rotate swiftly their working capital. Further, due to low creditexpansion by Banks in 2016, many of these suppliers have been unable to enhancetheir working capital facilities

• Finance Bill 2017 takes cognizance of this situation and provides that if due tonature of business of the supplier and due to application of Witholding VATprovisions, a supplier can sufficiently demonstrate that he is going to be in acontinuous credit position for a period of minimum of 2 years, then theCommissioner can exempt such supplier from applicability of such provision

w.e.f. 3 April 2017

Tax Reforms – Witholding VAT – Example of Trader with 4 % margin

Tax Reforms – Discouragement of rise in Betting, Gaming and Lottery culture in Kenya • The global gambling industry profits for the year 2016 were

estimated at $ 385 billion with online gaming accounting for 11%of the profits

• Sportpesa which was launched in Kenya in 2013 boasts over onemillion subscribers. The other companies in the Kenyan marketincludes Chezafutaa, Betway, Betin, Elitebet, Betyetu, Justbet,Easybet, Lucky ToYou and KenyaSportsBet

• Importation of slot machines in Africa has increased due to theirlow costs e.g. in Kenya, one can purchase a slot machine for aslittle as 100 Euros directly from the manufacturers

w.e.f. 1 January 2018

KRA powers expanded for Search and Seizure

• Tax Procedures Act 2015 has been amended to insert newprovisions that has empowers KRA authorised officers toenter and search any premises and seize, collect and detainevidence and produce such evidences in any proceedingsbefore a court of Law or Tax appeals Tribunal

• This change has gathered widespread attention and concernand it would be important for KRA to issue guidelines on ruleswithin which such new provisions would be operated to avoidany abuse

w.e.f. 3 April 2017

Disclaimer

Information provided here is of general nature and is not intended to address the circumstances ofany particular individual or entity. The Information compiled in this document has been drawnand interpreted from the Budget Statement by Cabinet Secretary for National Treasury on 30March 2017, Finance Bill 2017, Economic Indicators issued by Kenya National Bureau of Statistics,Central Bank of Kenya website, UCTAD Knowledge resource website, East Africa CommunityCustoms Resources. A misstatement or omission of any fact or a change or amendment in any ofthe facts and assumptions we have relied upon may require a modification of all or a part of thisdocument. Although we endeavor to provide accurate and timely information, there can be noguarantee that such information is accurate as of the date of it is received or that it will continueto be accurate in future. No one should action such information without appropriate professionaladvice and after a thorough examination of the particular situation

FCA. Simant PrakashInternational Contact Partner

CPA. Jitendra SwalySenior Partner, Kenya

CPA. Gurudas AnvekarSenior Partner, Tanzania

CA. Dipak ChatterjeeSenior Partner, India

CA. Vijay SastryDirector, Canada

Kamal IyarooDirector, Mauritius

CA. Imran JumaDirector, Kenya

Kenya | Tanzania | Mauritius | Canada |India

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