A tax is a mandatory financial charge or some other type of levy imposed upon a taxpayer (an individual or other legal entity) by a governmental organization in order to fund various public expenditures. In Kenya, the Kenya Revenue Authority (KRA) is responsible for the assessment, collection and accounting for all revenues that are due to government. Generally, the taxpayer incurs two forms of taxes; direct tax and indirect tax. A direct tax, such as income tax, is levied on the income or profits of the person who pays it. On the other hand, indirect tax, is incurred when you buy goods or services.
Income tax is a direct tax charged upon all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya.
Income Tax is imposed on;
- Business income from any trade or profession
- Employment income
- Rent income
- Investment income
- Income from services rendered among others
- Pensions among others
There are different methods of collecting income tax from companies and partnerships, based on their sources of income.
a. Corporation Tax
This is a form of Income Tax that is levied on corporate bodies such as Limited companies, Trusts, and Co-operatives, on their annual income. Companies that are based outside Kenya but operate in Kenya or have a branch in Kenya pay Corporation Tax on income accrued within Kenya only. The tax rate for resident companies is 30% and 37.5% for non-resident corporations on all taxable profits.
b. Pay As You Earn (PAYE)
This is a method of collecting tax at source from individuals in gainful employment. Companies and Partnerships with employees are required to deduct tax according to the prevailing tax rates from their employees’ salaries or wages on each payday for a month and remit the same to KRA on or before the 9th of the following month.
The monthly taxable income is as follows;
Ksh 11,180 and below
Ksh 11,181 to Ksh 21,714
Ksh 21715 to Ksh 32,248
Ksh 32,249 to Ksh 42,781
Ksh. 42,782 and above
c. Withholding Tax (WHT)
This is a tax that is deductible from certain classes of income at the point of making a payment, to non-employees.
WHT is deducted at source from the following sources of income:
- Management or professional fees (including consultancy, agency or contractual fees)
- Rent received by non-residents
- Other payments specified
Companies and partnerships making the payment, are responsible for deducting and remitting the tax to the Commissioner of Domestic Taxes.
WHT rates for residents.
Interest from bearer instruments
Interest from government bearer bonds
Qualifying interest from housing bonds
Qualifying interest from bearer instruments
Insurance brokers’ commissions
Insurance Agents Commissions
WHT rates for non -residents.
Rent Premium for Immovable Property
Rent Premium for Movable Property
Management and Professional Fees
Appearance or performance fees
Supporting/arranging an appearance
Management or Professional fees
Interest on bearer instruments
d. Advance Tax
This is a tax paid in advance before a public service vehicle or a commercial vehicle goes for the annual inspection. It applies to public service vehicles before registration as commercial vehicles. The rates for saloons, minibuses, station wagons and coaches are Ksh 60 per passenger capacity each month or Ksh 720 per passenger per annum. While for vans, pickups, trucks and lorries are Ksh 1,500 or Ksh 2400 per ton of load capacity per annum.
e. Installment Tax
Installment tax is paid by persons who have tax payable for any year that amounts to Ksh 40,000 and above.
2. Rental/Residential Income Tax
This is a tax charged on rental income received from renting out property. Taxation of rental income depends on how the rented property was used for residential or commercial purposes. Companies and Partnerships that rent out property to other persons for either residential or commercial use are required to pay income tax on rent received. To facilitate compliance, KRA appoints agents to withhold and pay, a percentage of the gross rent as tax. These agents can be verified via the agent checker on iTax.
As per The Finance Act of 2015, the tax payable on accrued incomes from residential property in Kenya is set at a maximum of Ksh 10 million per income year. The rate is 10% of the total monthly gross rent, payable before or on 20th of every month.
3. Value Added Tax (VAT)
Value Added Tax is charged on supply of taxable goods or services made or provided in Kenya and on importation of taxable goods or services into Kenya. While companies and partnerships can voluntarily register for VAT they MUST register if their annual revenue exceeds Ksh 5,000,000. To facilitate compliance, KRA appoints agents to withhold and pay, VAT on supplies made. These agents can be verified via the agent checker on iTax.
VAT applies as follows;
- 16 % – for all taxable products and services
- 0% – for particular groups of goods and services
4. Excise Duty
This is a duty of excise imposed on;
- goods manufactured in Kenya
- imported into Kenya and specified in the 1st schedule to Excise Duty Act, 2015.
Companies and Partnerships dealing in excisable good and services are required to pay excise duty. The list and types of Excisable goods and services are listed in the 5th Schedule as read together with Section 117 (1) (d) of the Customs and Excise Act, CAP 472 Laws of Kenya. They include:
- Mineral water
- Juices, soft drinks
- Cosmetics and Preparations for use on hair
- Other beer made from malt
- Opaque beer
- Mobile cellular phone services
- Fees charged for money transfer among others
5. Capital Gains Tax (CGT)
This is a form of income tax which is charged on a net gain that a business makes after sale of land or building.
6. Agency Revenue
This is a type of payment that KRA collects on behalf of various revenue collection agencies in Kenya.
The two types of Agency Revenue include;
- Stamp Duty
- Betting and Pool Tax
a. Stamp Duty
Stamp duty is a tax charged on transfer of properties, shares and stock. It is collected by the Ministry of Lands, which has seconded the function to Kenya Revenue Authority (KRA).
b. Betting and Pool Tax
This is a tax charged on winnings from betting, gaming and lottery activities. Betting, gaming and lottery businesses are required to withhold as tax, and pay to KRA, a percentage of the winnings being paid out to winners.
7. Customs Duty
Customs Duty is a tariff or tax imposed on goods when transported across international borders. KRA imposed this tax when goods are imported or exported from Kenya. Kenya applies tariffs based on the international harmonized system (HS) of product classification, and applies duties and tariffs of the East African Community (EAC) Common External Tariff. The rates vary on from one good to another. For imports an import, an import declaration fee of 2.25% of the cost, insurance, and freight is charged. The the customs department will then advise on the duty payable. In general, Customs duty is levied at rates between 0% and 100%, with an average rate of 25%. Imports into Kenya are subject to a standard VAT rate of 16%, levied on the sum of the CIF value, duty, and other applicable taxes.
8. Property Tax
This is a tax levied on land or land improvements (buildings) by the respective county government. Its pegged on the value of the property and its location. It varies from one county to another.
9. Entertainment Tax
This type of tax is imposed on entertainment related activities, for instance; concert tickets, hosting an event in a theater or studio.