On 11^th March 2020, the World Health Organization (WHO) declared Coronavirus disease (COVID-19) as a pandemic. This pandemic has brought the entire world on its knees as each country endeavors to control the spread of the virus while mitigating the ripple effects this will have on their economy. Kenya being one of the affected countries is also on the frontline in fighting this pandemic while putting measures in place to reduce the effects it might have on the economy.

Prior to the presidential address on the 25^th of March 2020 which comprehensively highlighted the targeted state intervention, the government had already begun engaging critical state actors on measures to mitigate the effects of COVID-19.

On the 20^th of March 2020, Hon. Ukur Yatani, the Cabinet Secretary for Treasury wrote a letter to KRA Commissioner General lifting the restriction on goods produced in export processing zones as a result of the deteriorating global chain supply caused by the pandemic. The Cabinet Secretary lifted the twenty percent (20%) restriction for the sale of the total annual production of the Export Processing Zones (EPZs), therefore allowing for 100% sale into the domestic market. The law currently does not allow for exemption of such goods from duty and taxes and thus requires legislative intervention. Consequently, the Government has taken a drastic measure of having to pay for duty and taxes to the Kenya Revenue Authority in respect of such goods before the law is effected by parliament. This is due to the global chain supply being affected by the pandemic, thereby becoming difficult to export the goods produced in EPZs.

On the 25^th of March 2020, President Uhuru Kenyatta delivered a presidential address on the state interventions to cushion Kenyans against the economic effects of the Covid-19 pandemic. The address by the President primarily highlighted some of the targeted measures by the Government in response to COVID-19. Most of these targeted state interventions turned out to be tax reliefs for individuals and businesses.

It is notable that some of the state interventions made by the President will take effect immediately while others will await parliamentary legislation. The Cabinet Secretary for the National Treasury and Planning has on the 26^th March 2020 vide Legal Notice No. 35 of 2020 has published in the Kenya Gazette the Value Added Tax (Amendment of the Rate of Tax) Order 2020 which shall take effect from 1^st of April 2020. The rest of the tax measures will await legislation by parliament effecting amendments to the Income Tax Act.

Those that require legislation will take effect upon a Bill being tabled in Parliament and enactment into law thereafter. Parliament is currently in recess and with the guidelines issued by WHO and the Ministry of Health on combating COVID-19, it is not clear how and when parliament will sit and pass these proposals into law.

Some of the tax measures aimed at increasing the disposable income for Kenyans include:

Individual income tax (PAYE)

The President has directed a 100% tax relief for persons earning a gross monthly income of up to Ksh. 24,000 and a reduction of the Income Tax rate from 30% to 25%. Ordinarily, PAYE is charged on a graduated scale ranging from 10% to 30%. Persons earning a monthly taxable income up to Kshs. 12,298 attract 10%. Persons earning above Kshs. 47,059 attract 30% tax which is now proposed to be reduced to 25%.

This will go a long way in increasing the disposable income for Kenyans in formal employment which according to the 2019 Economic survey conducted by the Kenya National Bureau of Statistics, the number of persons engaged in the formal employment grew by 5.0 percent and rose from 16.9 million in 2017 to 17.8 million in 2018.

This proposal requires an Amendment to the Income Tax Act and will not take effect until it is enacted into law.

Corporation Tax

The resident corporation Income Tax is proposed to be reduced from 30% to 25%. This only applies to resident companies and the rate for non-resident companies will remain at the usual 37.5%. Corporation tax is ordinarily payable annually and a taxpayer is allowed to compute the current year’s tax payable based on installment tax at the rate of 110% of the preceding year’s tax assessed or the estimated tax liability for the current year. This directive is thus very timely for taxpayers who will now take advantage of this incentive in computing their installment taxes.

This proposal equally requires amendment of the Income Tax Act for it to take effect.

Turnover tax

The President further directed the reduction of the turnover tax rate from the current 3% to 1% for all Micro, Small and Medium Enterprises (MSMEs) categorized as resident persons whose annual turnover does not exceed Kshs. 5,000,000 in any year of income. This tax triggered an uproar earlier in the year amongst SMEs upon its re-introduction by the Finance Act 2019 which took effect on the 1^st of January 2020.

Value Added Tax (VAT)

VAT rate – The President ordered the National Treasury to cause immediate reduction of the VAT from 16% to 14%, effective 1st April 2020. This is the most pragmatic measure because section 6(1) of the Value Added Tax Act 2013 gives the Cabinet Secretary, by an order published in the Gazette, powers to amend the rate of tax by increasing or decreasing any of the rates of tax by an amount not exceeding 25% of the prescribed rate. In essence, only goods and services subject to the general rate of 16% will benefit from this relief. Goods such as fuel that are subject to the new 8% VAT rate as introduced by the Finance Act, 2018 remain the same.

VAT Refunds – The Kenya Revenue Authority was directed to expedite the payment of all verified VAT refund claims amounting to Ksh. 10 Billion within 3 weeks; or in the alternative, allow for offsetting of Withholding VAT, in order to improve cash flows for businesses. VAT refunds can only be paid by the Commissioner to VAT-registered persons if the claims arise from making zero-rated supplies. Otherwise, in any other case where the input tax exceeds the output tax, the excess shall be carried forward to the next tax period as a tax credit.

Conclusion

We are actively looking to understand the economic and business impact of COVID-19 and develop innovative ways to support our clients in their preparedness to navigate this global outbreak. We are available to answer any questions about the above, or if you need assistance with any tax issues specific to your business.