A Brief Guide to taxes in Kenya
Step 1: Types of tax
There are five types of tax: income tax, rental income tax, value-added tax, excise tax, capital gains tax.
a) Income tax
This is charged for each year of income upon resident or non-resident persons whether the income was acquired in or derived from Kenya. It is imposed on business income (from a trade or profession), employment income, dividends and interests, pension income, income from a digital marketplace and other sources of income.
There are five ways of collecting income tax from companies and partnerships:
● Corporation Tax – It is levied on Limited companies, Trusts, and co-operatives. Companies that have a branch in Kenya. The rate is 30%; however, the rate for branches of foreign companies and PEs is 37.5%.
There are special rates for certain resident companies and non-resident companies as seen here.
Pay As You Earn (PAYE) – companies and partnerships with employees are required to deduct tax from their employees’ salaries/wages on each payday for a month. The company or partnership will submit the tax to KRA before the 9th of the following month.
● Withholding Tax (WHT) – this is tax deducted from income upon making payment to non-employees. Such sources of income include dividends, interest, royalties, etc. Companies and partnerships making the payment are meant to deduct the tax and remit it to the Commissioner of Domestic Taxes.
● Advance tax – tax paid in advance before a public service vehicle, or a commercial vehicle goes for the annual inspection. For pick-ups, vans, lorries, trailers, prime-movers and trailers the rate is Ksh. 1,500 per ton of load capacity subject to a minimum of Kshs. 2,400 per year of income. For station-wagons, saloons, mini-buses, and coaches, the rate is Ksh. 60 per passenger capacity per month subject to a minimum of Ksh. 2,400 per year of income.
Advance tax is not final tax because taxpayers must declare the same in their income tax returns which are submitted yearly and pay any additional tax that is due. It is due on the 20th of January or before the transfer of ownership of the vehicle.
● Instalment tax - is paid by persons who have a tax that is payable for any year, and it amounts to Ksh. 40,000 or more. The instalments are spread evenly at 25% of the tax due and payable on the 20th day of the 4th, 6th, 9th, and 12th months of the year of income for all taxpayers except the penalty those in the Agricultural Sector who pay in instalments of 75% in the 9th month and 25% in the 12th month.
It is paid through iTax, and a payment slip is generated which is presented together with the cheque drawn in favour of KRA at any of the partner banks.
The table below shows the current tax bands and rates of income tax:
Tax relief is an incentive that reduces the amount of tax one must pay. There is a personal relief of Ksh. 2,400 per month, in a year it would be Shs. 28,800. Non-Residents are not entitled to personal relief.
Individual income tax should be filed on or before the 30th of June of the following year. However, if an individual fails to do so, they are charged whichever is higher between 5% of the tax due or Ksh. 2,000. If there is late payment, a penalty of 5% of the tax is required and a 1% interest per month until the full tax is paid.
a) Rental Income Tax
This is tax received from rental income that depends on the use of the rented are: commercial or residential purposes. This tax is required from any company, partnership or individual that rents out space.
The rate is 10% on the gross rent received either monthly, quarterly, semi-annually, or annually, though the return must be filed monthly. No expenses, losses or capital allowances are allowed for deduction from the gross rent at the time of filing the return.
Landlords receiving rental income of between Ksh. 288,000 and Ksh. 15 million per annum are required to file and pay Monthly Rental Income (MRI). Those whose rental income does not fall under this threshold are to file annual income tax returns and declare rental income together with income from other sources. The MRI is filed on iTax on or before the 20th day of the following month.
Note: Any month a landlord does not receive rental income he or she is required to file a NIL return.
Rental income tax is final meaning any income from tax that is taxed under Rental Income Tax is not liable to any other form of tax.
Taxpayers who wish to pay annual rental income tax are required to request the Commissioner in writing.
This is 10% but has a cap, then increases
Penalty for late filing:
● 2,000 or 5% of the tax due whichever is higher for individuals.
● 20,000 or 5% of the tax due whichever is higher for corporates.
The penalty for late payment is 5% of the tax due and late payment interest of 1% per month on the unpaid tax until the tax is paid in full.
b) Value Added Tax
This tax is charged on supplied or imported taxable goods or services. Companies and partnerships can voluntarily register for VAT, but they must register if their annual revenue exceeds Kshs. 5,000,000. The VAT rate in Kenya is currently 16%.
The VAT tax rates in Kenya are:
- 0% for zero-rated supplies. These are goods listed in the 2nd Schedule to the VAT Act.
- 8% for petroleum oils obtained from bituminous, Motor Spirits such as Diesel Super.
- 16% which is the general rate for other goods and services.
VAT is payable when goods and services are supplied to the purchaser, an invoice is issued and payment for all or part of the supply is issued, a certificate is issued by any person either acting as a consultant or is in a supervisory capacity concerning the service.
VAT returns are submitted monthly through iTax on or before the 20th of the following month. Persons without a VAT to declare should submit a NIL return.
After filing the VAT online, you generate an E-slip that is used to physically pay the tax at the KRA appointed banks.
This is tax charged at a rate of 2% of the value of taxable supplies with effect from 07/11/2019. It does not apply where exempt goods, exempt services and Zero-rated supplies are involved. If withheld VAT is paid, it is viewed as an error hence refundable.
Withheld VAT is remitted by appointed withholding VAT Agents to the Commissioner on the 20th day of the month following deduction. The payments are made online via iTax. A taxpayer whose VAT has been withheld is still required to submit an online VAT return and account for the VAT balance.
c) Excise Duty
Such a duty is imposed on companies or partnerships dealing with goods manufactured and services provided in Kenya or imported into Kenya and specified in the 1st schedule of the Excise Duty Act, 2015.
Note: Under excisable services, ‘other fees’ earned by financial institutions excludes other fees earned from non-licensed activities.
In the Finance Act 2020, a licence is defined as:
● Under excisable services, it refers to the certificate of registration.
● Under excisable goods, it refers to a licence issued under Section 17 of the Excise Duty Act.
● Where carrying out of any other activity that the Commissioner-General of the KRA may require a licence, ‘licence’ refers to the licence required under Section 15 (1) (e).
d) Capital Gains Tax (CGT)
This is tax from gains a company or a person receives after transferring property. The rate of tax is 5% of the gains and it is a final tax meaning it is not subjected to further taxation after payment.
There are three types of CGT; land and building, shares, and exemptions listed of iTax such as income that is taxed elsewhere, where the proceeds after the sale of land are less than 3 million, marketable securities, disposal of property to administer the estate of a deceased person and when property is transferred between spouses during a divorce settlement.
When calculating CGT, the following terms must be understood:
● Net transfer value - this is the transfer value less the incidental expenses of the transfer.
●Adjusted cost of the property - this is the cost of acquisition, expenditure of enhancement of preservation of property, cost of defending title over the property and incidental costs of acquiring property.
● Capital Gain or Loss - this is the Net transfer value less the adjusted cost of property.
The amount payable will be 5% of the Net Gains
(Net gains - Sales proceeds minus Acquisition and Incidental cost)
CGT is due on or before the transfer of property but can also be paid before the 20th day after the transfer of property. The payment is done through the online iTax portal using cash, cheques or RTGs. After payment, a payment slip is received which should be presented to the KRA appointed bank together with the due tax to complete payment.
Note: The payment slip expires in 30 days.
Penalty for late payment
A penalty of 20% of the tax due and an interest of 1% per month for the period that the tax remains unpaid.
e) Agency Revenue
A payment KRA collects on behalf of various revenue collection agencies in Kenya. There are two types of Agency Revenue:
● Stamp Duty – This is the tax charged when stocks, shares or properties are transferred. It is collected by the Ministry of Land.
Non-payment of stamp duty results in invalidity of the relevant transaction, an agreement signed between the parties becomes null and void, and the transaction becomes inadmissible evidence in a Court of Law.
If the transaction documents were prepared in Kenya, payment of stamp duty should be within 30 days. However, if the transaction documents were prepared abroad but sent for registration locally, the payment of stamp duty should be within 30 days of receiving the documents.
The process of paying Stamp Duty
Present the legal instrument for assessment.
Go to the KRA Website, iTax and print the Payment slip.
Make payment at a KRA appointed bank.
Present copies of the Payment slip and banking slip for confirmation of payment.
After confirmation, present the legal instruments for franking.
Collection of the franked documents ready to be presented for registration
● Betting and Pool Tax – this is charged on gross gaming revenue (GGR) at a rate of 15%; betting gaming and lottery businesses are required to withhold and remit tax of 20%; excise duty on betting is charged at 20% of the amount wagered or staked.
Step 2: Nil Returns
Nil returns are filed when an individual has not declared any income. Once an individual attains the age of 18 years (eighteen) and gets their ID (Identification Card), they are required to register with KRA. After this is done, they must file their nil returns if they do not have a declared source of income.
Nil returns are filed annually.
Step 3: How to file nil returns
Go to the iTax portal: www.itax.kra.go.ke
Enter your pin then click continue
Enter your password and security stamp then log in.
Update the professional details.
Go to the returns menu.
Select file nil return.
Select the tax obligation and click next.
Enter ‘return period from’.
Download the returns receipt
Step 4: Penalty for failure to file Nil Returns
When an individual fails to file nil returns, it leads to a penalty of Ksh.2,000.
Note: The penalty is not stagnant as it was higher in the past.
Step 5: Offences and penalties related to tax
Offence - Late filing of Pay-as-you-earn (PAYE)
Penalty - 25% of the tax due or Ksh. 10,000, whichever is higher.
Offence - Late payment of PAYE tax
Penalty - 5% of the tax due and interest of 1% per month
Offence - Failure to deduct Withholding VAT and Withholding Rental Income Tax
Penalty - 10% of the amount of the tax involved
Offence - Late payment of Withholding Tax (Withholding Income Tax, Withholding VAT, Withholding Rental Income Tax)
Penalty - 5% of the tax due
Offence - Late filing of MRI Returns
Penalty - 5% of the tax due or Ksh. 2,000 whichever is higher for Individuals or 5% of the tax due or Ksh. 20,000 whichever is higher for Non-Individuals
Offence - Late payment of MRI
Penalty - 5% of the tax due and interest of 1% per month
Offence - Late payment of Stamp Duty
Penalty - 5% of the duty payable
Offence - Late filing of the Excise Duty return
Penalty - 5% of the tax due or Ksh. 10,000, whichever is higher
Offence - Late payment of Excise Duty Tax - Penalty - 5% of the tax due and interest of 1% per month
Offence - Late filing of the VAT Return
Penalty - 5% of the tax due or Ksh. 10,000 whichever is higher
Offence - Late payment of the VAT tax
Penalty - 5% of the tax due and interest of 1% per month
Offence - Late filing of Income-tax company or partnership returns
Penalty - 5% of the tax due or Ksh. 20,000 whichever is higher
Offence - Late payment of Income-tax for Non-Individual
Penalty - 5% of the tax due and interest of 1% per month
Offence - KRA PIN-related offences
Penalty - Ksh. 2,000 per offence.
How to pay KRA penalties
Open the KRA portal.
On the iTax homepage, enter your KRA PIN on the slot next to “Enter PIN/User ID”. You will find this on the left side of the page. Press the Enter key on your keyboard then key in your password and Security Stamp. Click Login.
On your iTax homepage, locate the Special Residential Rental Income Tax Return form, download it, and print it.
Fill the form with the correct information. Ensure you fill all the mandatory sections.
After filling the physical copy, upload the form to the KRA portal.
You can generate an electronic payment slip.
Choose the payment method you wish to use.
*If you have chosen the Mpesa method, follow the following steps:
Have your KRA pay bill number and your account number. The personal account number is found on the top right of the electronic payment slip and it will act as a payment registration number.
After completing the payment, you will receive a message confirming the payment.
Step 6: Taxes a business should pay
In Kenya, resident companies, in general, are taxed on income accrued or derived from Kenya. Resident companies that have businesses registered outside Kenya are taxed on income from business activities outside Kenya. However, such companies can claim a relief of any tax paid in the foreign countries where their branches are located. This is only possible if there is a Double Tax Agreement in place between Kenya and that country or county.
Non-resident companies pay Kenya Corporate Income Tax (CIT) only to the profits attributed to a Kenyan PE.
The rate of CIT for resident companies, and even companies that have foreign parent companies, is 30%. The CIT rate for branches of foreign companies and PEs is 37.5%.
Note: If a business did not receive any income from which tax is deductible, they are to file NIL returns.
Step 7: Tax Compliance
Tax compliance, which is also known as a Tax Clearance Certificate, is an official document issued by the Kenya Revenue Authority (KRA) to serve as proof of having filed and paid all your taxes. There are four certificates issued by the KRA under tax clearance:
● Tax Compliance Certificates for Taxpayers seeking tenders with Government Ministries and Institutions.
● Tax Compliance Certificate for employees leaving service nor seeking new job opportunities.
● Tax Compliance Certificates for taxpayers seeking liquor licences.
● Tax Compliance Certificates to clearing and forwarding agents.
All Tax Compliance Certificates (TCC) are valid for twelve (12) months after which they must be renewed. To apply for your TCC, you should visit the iTax platform and ensure:
● You have filed your tax returns on or before the due date for all applicable tax obligations.
● You have paid your tax on or before the due date.
● You have cleared all your outstanding debt.
Step 8: Process of Applying for Your Tax Compliance Certificate Using the iTax Website
The following points are the checklist to be followed when applying for the Tax Compliance Certificate.
1. On the iTax homepage, enter your KRA PIN on the slot next to “Enter PIN/User ID”. You will find this on the left side of the page. Press the Enter key on your keyboard then key in your password and Security Stamp. Click Login.
2. On the new page that appears, along the red bar that is located at the top of the page, click on “Certificates” then select “Apply for Tax Compliance Certificate (TCC)”. On the new page that will appear, scroll down until you can see the statement “Reason for Application”. On the empty slot next to it, state why you need the Tax Compliance Certificate. The reason will fall under the category of the Tax Compliance Certificates listed above. For example, if you need a TCC so that you can get a liquor licence, your reason will be “to apply for a liquor licence.” After you are done typing your reason for applying, click submit.
3. There will be a pop-up question “are you sure you want to submit the data”, click ok. Two statements will appear on your page. The first one will welcome you. The second one will state that you have successfully submitted your application for a TCC. A statement beginning with “Click Here to download…” will be seen. Click on the link at the end of that statement to get your confirmation receipt. A pop-up will appear, on it, select “Start Download”, then on the next pop-up select “open”. You will be able to view your confirmation receipt.
In your email, you will receive further instructions from iTax. Another email will be sent by KRA a couple of days later.
NB: If you have followed any of the above steps and you are still facing problems, contact the KRA support team for assistance. The support team is found on the home page.
Disclaimer: This article is not to be taken as legal advice. Kindly contact us to be directed to a Tax Lawyer