KPMG Budget Brief

Budget Brief

Kenya 2013

Regional Economic HighlightsThe East African Community (EAC) countries with the exception of Burundi recorded real GDP growth rates of over 5.5% in 2012. During the year, the regional macroeconomic environment stabilized with key indicators such as inflation and interest rates recording significant declines compared to the previous year.

Due to election related disturbances experienced in Kenya in 2008, there was uncertainty in the period leading to the year 2013 general elections resulting in subdued business activity which reflected in the country’s lacklustle economic

performance. Kenya managed a peaceful transition and is expected to experience higher economic growth rates commensurate with other countries in the region if the global macroeconomic environment holds.

The East African Countries have benefited from significant foreign investment especially in the areas of natural resource exploitation with Uganda and Tanzania expected to become key players in the global energy market. Kenya has also made significant strides especially in oil and coal exploration and should these investments succeed, the region will become a net energy exporter in the

Kenya Tanzania Ugandaa Rwanda

GDP current prices (USD’ Million) 40,413.18  28,539.90 21,312.20 7,223

Real GDP growth rate (%) – 2013 5.60 6.80 5.70 7.50

Real GDP growth rate (%) – 2012 4.60  6.50 4.20 7.70

Population (Million) 40.70  44.9 35.36 12.0

GDP per capita current prices (USD) 992.95 635.63 602.72 601.92

Overall inflation rate (%) 9.40 11.1 7.1 6.3

Treasury bill interest rate (%) 8.30  13.08 17.13 7.2

Budget deficit % of GDP at current prices 14.45  5.50 3.9  6.1

Development expenditure as a % of GDP at current prices 13.37 10.07 7.60 16.9

Development expenditure as a % of total expenditure 30.00  30.25 39.73 48.5

Total public debt (USD million) 17,829.72  14,801.75 6,162,42 1,365.21

Trade deficit as % of GDP current prices 24.90 15.14 3.31 11.9

Tax revenues (USD million) 10,177.52  4200.00 2,882.50  1,510.17

May the oil flow - and in commercial

quantities

This publication is based on information publicly available as at 13 June 2013

KPMG Budget Brief

near future. This has the potential to change the growth dynamics of the region dramatically.

The region has also taken key steps in the development of infrastructure with investments in energy, roads, airports and railways. These investments will ease the cost of doing business across the region and allow products from the region to compete globally.

Substantial steps still need to be taken to increase the level of business among the East African countries through the reduction of non-tariff barriers, improvements in the transport networks, harmonization of the regulatory regimes and facilitation of free movement of labour and capital. This will be the challenge for the leaders of the East Africa Community in 2013/14.

Kenyan Budget EnvironmentKenya promulgated a new Constitution in 2010, unleashing radical changes to the country’s social, political and economic governance structures. Most of these changes took effect with the election of new government following the 2013 general elections. The key changes include the introduction of a devolved system of the government, reforms to the judiciary, introduction of bicameral system of government and increased parliamentary oversight over the budgetary process.

With the restructuring of the Executive, ministerial responsibilities will now be handled by technocrats and not politicians as was the case previously. Indeed the Cabinet Secretary for the National Treasury had to receive a special invite to present the budget statement to parliament.

Kenya experienced a marginal increase of the real GDP growth rate from 4.6% to 5.6% in 2012.The growth is largely attributed to improved performance of the agricultural sector which contributes

Focus on rail transport, a reprieve for roads

Contributions to GDP (%)

Sectors 2011 2012

Agriculture 23.8 25.9

Manufacturing 9.6 9.2

Construction 4.1 4.1

Wholesale and retail trade 12.2 11.8

Transport and communication 9.9 9.3

Financial services 6.3 5.2

Public Services 16.4 16.5

Sector contributions to GDP

over 25% of the total GDP. The contribution to GDP from the other sectors remained largely unchanged or decreased during the year. Other factors contributing to growth include stability of the Kenya shilling and the macroeconomic environment with inflation and interest rates recording significant decline during the year. During the year, the Government experienced significant budget pressures as a result of the implementation of governance structures required under the new Constitution, conduct of the general elections, award of salary increases for various government employees and the incursion into Somalia. The increase in domestic revenue collections did not match the expectations forcing the Government to rely heavily on borrowing from the domestic markets to finance critical expenditures.

The challenges facing the Government in coming years include expanding the revenue base to counter the exhaustion of tax collections from trading sources, rationalizing the expenditure to prioritize development expenditure and controlling the public appetite for increased wages.

In the social scene, the economy created 659,400 jobs with the informal sector contributing 591,400 jobs (90%). While this is an improvement from the previous years, the quality of the jobs created remains an issue of grave concern.

Activity at the Nairobi Securities Exchange rebounded strongly during the year on the back of increased investor confidence. The market capitalization increased by 46.5% between December 2011

KPMG Budget Brief

Sector Contributing to GDP

The Budget HighlightsThe 2013/14 budget is aligned to the Jubilee Manifesto. To emphasize the key messages of change promised to the Kenyans during the campaign period, the theme of this year’s bud-get was “Transformation for shared prosperity”.

The budget statement provides the action plan for the government to reinvigorate inclusive growth through focus on the following key areas:

a) Accelerating growth through improved productivity and competitiveness

b) Supporting SMEs through financial support, skills development and revamped procurement system

c) Continuing public and private investment programs with a focus on infrastructure

d) Improving quality of educa-tion and training through ICT

e) Modernizing the police force to curb crime

f) Food security though open-ing up 1 million acres of new land through irrigation

g) Maintaining a strong macro-economic environment

h) Extending the tax base and enhancing efficiency in pub-lic expenditure

i) Supporting devolution through capacity building

j) Enhancing social protection for every Kenyan

Fiscal indicators 2011 (%) 2012 (%)

Operating balance as % of revenue -6.6 -15.7

Borrowing as a % of revenue -18.7 -36.5

Government expenditure as % of GDP 36.6 47.4

Regional integrationThe EAC and the neighboring regions have a large untapped market which can play a key role in achieving eco-nomic growth. The region plays a sig-nificant role as the principal market for Kenya’s exports. The government is keen to ensure key integration with both the EAC and the COMESA trading blocs through reforms to the common external tariff structure, removal of inefficient customs pro-cedures, and collaborative infrastruc-ture investments.

SecurityFollowing high incidents of insecurity experienced during the year, the Gov-ernment proposes to invest heavily in security operations to support growth and development. The key reforms are aimed at modernization of the current security systems through allocation of KShs 67Bn for the National Police Services. These amounts will be used to purchase security equipment, enhance secu-rity operations, crime research and investigation, motorizing the police force and development of housing units for the police force.

and December 2012, while the bond turnover increased by 26.7% over the same period as a result of positive market sentiments. The market is expected to remain bullish in the near future following the peaceful political transition.

The Government has continued to adopt expansionary fiscal policy to support medium to long-term growth objectives under Vision 2030. While expenditures have grown, the Government has continued to experience shortfalls in targeted

revenues, with key fiscal indicators assuming a negative trend.

The country’s trade deficit widened during the year, with the import bill growing by 5.7% while the exports remained relatively unchanged. As a result, the trade deficit grew by

8.7%. The African market remained the key destinations for nearly 50% of Kenya’s exports with Tanzania and Uganda contributing a significant share of the country’s export earnings.

Fighting balckouts through an integrated regional power pool

KPMG Budget Brief

InfrastructureThe 2013/14 budget aims at providing an enabling business environment for the private sector to thrive and prosper. This will be achieved through improved infrastructure including expenditure of KShs 97.9 Bn on road expansion, KShs 22 Bn on a standard gauge railway line from Mombasa to Kisumu, 78.5 Bn on scaling up reliable and affordable energy, and 3.7Bn to commence the develop-ment of berths at the Lamu Port under the LAPSSET project.

Reforming the procurement lawDue to challenges experienced in the public procurement process, the budget made proposals to reform the public procurement process. Key changes to be implemented will include reduced turn-around time in

the procurement process to 30 days, Enhanced preference and reservation of participation in public tenders for the youth, women and people with disabilities from the current 10% to 30% and according exclusive prefer-ences to local firms under the Buy Kenya, Build Kenya initiative.

Transforming the education systemsIn an effort to improve quality and transform the education system to knowledge based economy, the 2013/14 budget has allocated KShs 10.3 Bn towards free primary educa-tion, KShs 2.6Bn for school feeding program, KShs 20.9Bn for free day secondary education and KShs 1.17Bn for secondary school bursary programs. Other programs that are set to benefit include upgrade of

national schools (KShs 800m), HELB (KShs 4.9Bn) and youth polytechnics (KShs 826m).

Social protectionThe less fortunate, the elderly and persons with disabilities have received a significant boost aimed at doubling the beneficiaries of the welfare program started under the previous government. This is through allocation of Kshs 8Bn for the orphans and vulnerable children, KShs 3.2Bn to double the number of the elderly persons under the cash transfer scheme, KShs 1.22 Bn for the disabled persons, KShs 400M for presidential secondary bursary scheme, KShs 360 M for the urban food subsidy and Kshs 100M for albinos.

Inclusive growth and prosperity for all

KPMG Budget Brief

Income Tax

Personal Tax

Group Life and Group Personal

Accident (GPA) premiums – Caesar

grudgingly concedes

It appears that the taxman has finally

conceded, albeit grudgingly, that

Group Life and GPA premiums are

not taxable on the employees.

This concession follows a protracted

dispute between the taxman and

the taxpayers at both the Local

Committee and the High Court.

After losing at the two arbitration

levels, the taxman has finally thrown

in the towel.

Continued relief or alignment with

similar tax law?

The Persons With Disability Act 2003

exempts from income tax, the first

KShs 150,000 per month earned by

persons with disability. However, the

tax exemption is valid for three years.

The Finance Secretary has proposed

to extend the tax exemption from

three to five years.

The proposed amendment will align

the validity period with that of other

Charitable Institutions.

For ease of administration, the

Finance Secretary should consider

indefinite exemption!

Corporation tax

Roulette tax now on!

The Cabinet Secretary has proposed

to levy WHT on gains from gaming

and betting. This measure was first

introduced in the Finance Act 2012,

but no effective date was gazetted.

We are likely to see implementation

of this tax through issuance of a

commencement date.

Capital Gains Tax.... will it see the

light of day!

Yes, it appears like Capital Gains Tax

(CGT) is back!

Although the Eighth Schedule to the

Income Tax Act has been a distant

memory for 27 years, the Cabinet

Secretary proposes to end the

tax holiday even though previous

attempts have failed.

Given the monumental budget of

KShs1.65 Trillion, coupled with the

boom in property business, CGT may

finally see the light of day.

Constitutional bliss

Taxpayers have taken advantage of

Article 47 of the new Constitution on

fair administrative action. These bold

actions have led to interesting Court

rulings against the taxman.

In the spirit of promoting and

institutionalizing fairness and justice

in tax administration, the Cabinet

Secretary proposes to align the Excise, Value Added Tax and Income Tax legislation with the Constitution.

Additionally, the exemption regime under the Income Tax Act will be aligned to Article 210 of the Constitution to ensure no State Officer is excluded from payment of tax by virtue of their position.

Harmonizing the First Schedule to the Income Tax Act with the Constitution will reduce the number of tax exempt persons leading to increase in tax revenues.

Widening the corridors of justiceIn a bid to open up the avenues for dispute resolution, the Income tax Act will be amended to introduce the compounding of offences. This is aimed at encouraging speedy dispute resolution.

However, this avenue is a quasi-judicial process and the taxman may arbitrarily use it to intimidate taxpayers into agreeing to offences under the Income Tax Act.

One Appeal TribunalThe Cabinet Secretary proposes to table a Tax Appeals Tribunal Bill that will establish a single tax appeals body to harmonize the appeals process and hasten the tax dispute resolution mechanism.

Furthermore, all administrative challenges and procedures facing taxpayers on filing matters to separate disputes arbitration bodies shall be ironed out. This appears to be in line with ‘simplification’, which is one of the cardinal principles of taxation.

Lifting the veil of incorporation - Principal Officers’ watch-out!Adherence to corporate governance has been taken a notch higher. Fraudulent principal officers of companies shall no longer escape

Capital gains tax to be re-introduced

KPMG Budget Brief

the hand of justice. The Budget proposes to impose corporation tax liability on any such officer adjudged by the Court as fraudulent, with the intention of evading tax.

Rental income – KRA not relenting!The KRA shall apply all reasonable effort and technology to map-out residential and commercial property

for effective administration of tax on rental income. The KRA has already partnered with property developers within the Kenyan market to set-up the framework for comprehensive map-out of property.

This move will bring the ever elusive landlords into the tax ambit.

Value Added TaxBack to the drawing boardThe Cabinet Secretary intends to re-introduce the VAT Bill as one of the measures to bridge the revenue gap.

When it was first tabled in Parliament, the VAT Bill was widely criticized for proposing to charge VAT on basic commodities. It will be interesting to see how the Cabinet Secretary balances between revenue generation and easing the cost of living for the common mwananch.i

Rental properties under the taxman’s glare

Will VAT be applicable on essentials

Given the monumental budget of KShs1.65 Trillion, coupled with the boom in property business, CGT may finally see the light of day.

KPMG Budget Brief

Customs and ExciseCustoms & Excise

Custom & excise duty- tariff amendments

In a raft of measures to reduce controversy of applicable duty rates, protect local industries and spur development in the infrastructure and energy sec-tors, the government has proposed the following changes:

New lease of life for the railway transport system

Commodity General hs code Rate to remain Rate under cet

Wheat grain 10.01 10% 35%

Rice 10.06 35% / $100 per metric ton

75% / $200 per metric ton

Glucose & glucose syrup 17.02 0% 10%

Paper and paper board 48.0248. 04 48.0548.10

10% 25%

Deepening Regional IntegrationIn an effort to reform the Common External Tariff regime to facilitate trade and reduce distortion among member states, EAC member states have proposed to remove inefficient customs procedures, including com-plicated Rules of Origin and other non-tariff barriers. This move should see the volume of intra-community trade rise. This, coupled with other investment incentives may focus competition for investments amongst member states.

Hoot! Hoot! Here comes the

train...

Items used to facilitate railway oper-ations will now be duty exempt upon importation into Kenya. This proposal is designed to encourage investment in rail transport as an alternative and more economical mode of transport for goods and passengers.All importers will however contribute to this noble infrastructure initiative following the introduction of a 1.5% Railway Development Levy on all imports into Kenya.

Mombasa port - cracking the whip

to safeguard revenuesTanga port in Tanzania is positioning itself as an alternative discharge port for goods destined for the East & Central Africa region. This is partly as a result of inefficiencies at the Mombasa port. In a radical move to safeguard revenues, the Treasury Secretary has proposed a rental charge for goods which remain at the port of discharge for a period exceeding 21 days from the date of commencement of discharge of the carrier.

Not only is this proposal expected to reduce congestion in Mombasa, Kenya Ports Authority is set to rake in millions in rent. KRA will happily be waiting for the VAT on this rent.

Commodity Tariff heading Old rate New rate

Items facilitating railway operations 73.02 10% - 25% 0%

Wielding electrodes 83.11 10% 25%

Millstones and grindstones 68.04 0% 25%

Plastic packaging tubes for toothpaste, cosmetics and similar products

39.23 10% 25%

Millet, Sorghum & Cassava beer (excise tax remission)

22.06 (100%) (50%)

Senator Keg (excise tax remission) 22.06 (100%) (50%)1 over three years

Magnetic media cards (unrecorded) 85.23 10% 25%2

Plastic bag biogas digesters 39.23 25% 0%

In order to safeguard supply of wheat, basic food commodities and raw materials for confectionaries, Kenya has proposed a one-year extension of remission of duty on the following:

Other ActsComplete overhaul, time to catch-up In a bold move, the Cabinet Sec-retary has proposed a complete overhaul of the Insurance Act and the Retirement Benefits Act. With this, the Cabinet Secretary seeks to align the two Acts with international best practice as well as the new Consti-tution. The overhaul exercise shall culminate into two pieces of legisla-tion for the insurance and retirement benefits sub-sectors: one establish-ing the respective administrative authority and the other dealing with regulatory issues.

These measures are aimed at foster-ing confidence in the management of insurance business and retirement benefits which are of great public interest. The draft legislation is ex-pected to be in place by September 2013 and December 2013 for the insurance and retirement benefits, respectively.

Strengthening the EAC Market Protocol In a bid to support the EAC Common Market Protocol, the Cabinet Secre-tary proposes opening up ownership of insurance companies and broker-age firms to EAC citizens. Previously, ownership of insurance companies and brokerage firms was largely limited to Kenyan citizens.

In addition, the ownership of the in-surance agents has been opened up to foreigners. This move is aimed at providing a platform for multinational banks in Kenya to provide insurance

products.

In another show of support to the EAC Common Market Protocol, the Cabinet Secretary has proposed to amend the Capital Markets Act to enable issuance of regional fixed income securities such as bonds, certificate of deposits and preferred stocks.

This proposal will enable compa-nies and other corporate bodies to economically access funds from the region and is likely to excite county governments.

A relief for policyholdersIn a move to hasten the insurance compensation process, the Cabinet Secretary has proposed to amend the law to the effect that only competent persons familiar with the business of the insurer shall be appointed in instances where the Insurance Regulatory Authority (IRA) places an insurer under statutory management.

The Cabinet Secretary has enhanced the mandate of the Policyholders Compensation Fund (PCF) and Kenya Deposits Insurance Corpo-ration (KDIC). PCF will no longer be a spectator as its mandate now includes participation in the liquida-tion process.

These measures are aimed at ensur-ing a fair and speedy compensation process.

Insider trader? Presumed Guilty!With a view of deterring insider trad-ing and market manipulation in the capital markets, the Cabinet Secre-tary has in a bold move proposed to classify insider trading as an offence of strict liability.

This means that any person in a privileged position who buys or sells securities based on confidential fi-nancial information obtained by virtue of their position in the organization shall be presumed guilty without necessarily proving his guilty inten-tion.

In addition, the Cabinet Secretary proposes to list the most common market manipulation offences to guide the courts and investors of the nature of such offences.

Similarly, the Cabinet Secretary has proposed changes to the Banking Act and the Microfinance Act aimed at deterring violation of the respective laws. The above changes are aimed at fostering a sound financial system, which should come in handy in the wake of rising bank fraud.

Housing the nation!The Cabinet Secretary has pro-posed to amend the relevant laws to provide a conducive environment that will facilitate pooling of resourc-es through Real Estate Investment Trusts (REITS) for real estate devel-opment purposes. Consequently, we once again, expect new tax friendly capital market products offerings and services to be rolled out soon!

The budget proposals included in this BudgetBrief may be amended significantly before enactment of the Finance Act. Please note that our interpretation of tax legislation may differ from that of the various Revenue Authorities. Similarly, the content of this BudgetBrief is intended to provide a general guide and should not be regarded as a basis for ascertaining tax liability or as a substitute for professional advice. If you would like specific advice on the contents of this publication, please get in touch with your regular contact at KPMG

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