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Finance Bill 2024 concessions and the questions that beg

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Police arrest protestors during anti-finance bill demonstrations along Kimathi Street in Nairobi on June 18, 2024.

Photo credit: Sila Kiplagat | Nation Media Group

The Kenya Kwanza Parliamentary Group meeting which took place at State House Nairobi on Tuesday morning generated notable concessions on the Finance Bill 2024 among them shelving the proposed introduction of Motor Vehicle Tax via an amendment to the Income Tax Act.

The concessions, though widely celebrated, raise a number of questions that should shape the discussion going forward regarding the Finance Bill which, as initially drafted, sought to raise Sh346.0 billion worth of additional tax revenue in the financial year 2024/25.

The government has announced introduction of a threshold for issuance of electronically generated invoices (eTIMS) at Sh1.0 million in annual turnover. This means that going forward, any business whose annual turnover is Sh1.0 million or less will not be required to issue eTIMS generated invoices.

Whereas this move appears to ease tax compliance for small businesses, it raises a number of questions.

eTIMS exemption

First, it must be accompanied by a corresponding amendment to Section16 of the Income Tax which provides that effective January 1st, 2024, only invoices generated through eTIMS will be deemed to be income tax deductible. Unless this corresponding amendment is effected, the threshold will not yield any relief to small businesses.

Second, it raises the question of how exactly a large business procuring services from a small business will be able to verify the latter’s turnover threshold.

In other words, when the large business finally wishes to claim expenses incurred in sourcing business from a non-eTIMS generating business, on whom will the burden of proof fall? Is it the large business? Is it the small business?

As long as this uncertainty is not cleared, no large business will risk engaging with a small business knowing it is uncertain as to how to justify to the Kenya Revenue Authority (KRA) the threshold of the business for whose non-eTIMS generated invoices it wishes to make a claim. 

VAT threshold adjustment

Another concession made by the Kenya Kwanza government regarding Finance Bill 2024 is the increase in the threshold for Value Added Tax (VAT) registration from the current Sh5.0 million to Sh8.0 million. This proposal aligns with the provisions already contained in the Medium-term Revenue Strategy 2024/25 – 2026/27.

However, a question looms – how will the government reconcile the idea of raising the VAT threshold with Section 23 of the Tax Procedures Act which demands mandatory issuance of eTIMS invoices for all businesses? What will be the shape and form of the expected amendment to Section 23 of the Tax Procedures Act regarding mandatory issuance of eTIMS invoices?

If the VAT threshold is being adjusted to ease tax compliance for any business whose annual turnover is Sh8.0 million and below, why not extend the exemption from eTIMS to all businesses whose annual turnover falls below Sh8.0 million and not just those whose turnover falls below Sh1.0 million? Isn’t that a case of incoherence in policy?

Dropping Motor Vehicle Tax

Finance Bill 2024 had contentiously proposed to introduce an amendment via Section 12H to the Income Tax Act providing for Motor Vehicle Tax at 2.5 percent the value of a unit with Sh5,000 as the minimum amount. The Kenya Kwanza administration now indicates that this proposal has been dropped.

The question that begs following the expunging of the Motor Vehicle Tax from Finance Bill 2024 is how the government plans to plug the revenue hole it that would create. The proposed tax sought to realise Sh58.0 billion in 2024/25, accounting for a staggering 17.0 percent to the total additional tax revenue targeted via Finance Bill 2024.

What does this adjustment mean? Is the revenue shortfall for 2024/25 expanding by Sh58.0 billion to Sh655.0 billion? Is the Appropriations Bill 2024 slashing planned expenditure by Sh58.0 billion to cater for this revenue downgrade? Something has to give and at this point, it is not clear what that will be.

Retaining bread as VAT zero rated

The Kenya Kwanza government has further announced that the proposal to introduce VAT on bread at 16.0 percent has been dropped and the product will retain its VAT zero rated status. Whereas many households and businesses can now heave a sigh of relief, it begs some questions.

On June 13th whilst tabling the 2024/25 budget speech, Treasury CS, Prof. Njuguna Ndung’u announced the imminent radical overhaul of the VAT Act through which only products and services destined for export would be deemed eligible for VAT zero rating. How will bread be accommodated given this change in Kenya’s architecture of zero rating going forward?

Also, part of Kenya’s commitment to the International Monetary Fund under the ongoing programme is the rationalisation of the Sh393.0 billion tax expenditure of which Treasury has indicated refunds to bread manufacturers alone accounts for Sh45.0 billion.