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Kenya Budget Speech Bulletin 2017

31st March 2017 | Ace Group |

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Caveat
The content of this bulletin is for informational purposes only. The content is not intended in any way to be a substitute for professional advice, in making decisions, and the authors and the enti-ties affiliated with them are not responsible for any loss, resulting from acting on this information. This information is based Kenya Budget Statement for the Fiscal year 2017/18 delivered by the Cabinet Secretary, National Treasury, to the National Assembly on Thursday, the 30th March, 2017 at 3:00p.m. The Finance Bill once passed by parliament, may have some changes to the proposals
“Creating Jobs, Delivering a Better Life for All Kenyans
31st March 2017 | Ace Group | : Kenya Budget Speech Bulletin 2017
“Creating Jobs, Delivering a Better Life for All Kenyans”
Economic Environment Overview
The Kenyan economy has continued to register robust growth despite the slower
global and regional growth. The economy grew by 5.9 percent, 6.2 percent and 5.7 percent in the first, second and third quarters of 2016 respectively, bringing the average growth for the first three quarters to 5.9 percent. In 2017, the economy is projected to further expand by 5.9 percent, but growth could be lower if the ongoing drought persists and the slowdown in private sector credit is not reversed.
The Kenyan economy is growing at twice the pace of global growth and more than
twice that of Sub Saharan Africa. We are also growing faster than both Nigeria and South Africa whose growth is projected at 0.8 percent in 2017 for each country.
The Government is committed to progressively reduce the fiscal deficit and ensure the con-tinued sustainability of our debt. In the FY 2017/18, we project the fiscal deficit to decline to 6.0 percent of GDP from an estimated 9.0 percent in the FY 2016/17. The sharp reduction of the deficit reflects reduced expenditures owing to the one off expenditures mainly those re-lated to the General elections and the drought which are not expected to recur in FY 2017/18.
Over the medium term, the deficit is expected to narrow to 4 percent of GDP
by 2019/20 which will further lower our debt-to-GDP ratio.
To further reinforce price stability, our proposed fiscal policy will help keep interest rates low and stable and the exchange rate broadly stable and competitive to support our exports.
Interest Rates
Following the implementation of the Banking (Amendment) Act 2016, on capping
interest rates, this has reduced the bank lending rates, and increased deposit rates offered to savers. The maximum lending rate currently stands at 14 percent while interest earning deposits are now remunerated at 7.0 percent. To progressively reduce the interest rate
31st March 2017 | Ace Group | : Kenya Budget Speech Bulletin 2017
“Creating Jobs, Delivering a Better Life for All Kenyans”
Business Overview
Kenya’s business environment has improved remarkably. Over the past three years, Ken-ya’s ranking in the World Bank’s Doing Business indicators has improved from 136 to 92, largely due to reforms in getting credit, getting electricity and ease of starting a business. In 2016, we were ranked third out of the World’s top ten reformers.
Kenya is a preferred investment destination in Africa with many major companies from across the globe starting operations in the country. As a result, foreign direct investment (FDI) has risen from about US dollar 0.514 billion in 2013, to at least US dollar 2.3 billion in 2016.
Special Economic Zones
The SEZ Authority is now fully operational, the Government has started rolling out Special Economic Zones (SEZs) in key urban areas including Mombasa, Lamu and Kisumu, as part of the Vision 2030 goal to diversify manufacturing activities, create employment and boost Kenya’s investment profile.
Under the Special Economic Zones (SEZ), the Government will provide a host of incentives for industries to operate in and boost creation of modern urban centers. These incentives include exemption on VAT, reduced corporate tax rates for a defined period, access to quali-ty infrastructure, and one stop shops for licenses.
Once operational, the SEZs will further facilitate importation of necessary raw materials and exporting of finished goods, thriving of agro-industrial activities, and allow for access to re-gional markets.
Agriculture
To add value to the agricultural sector, the government will focus on the
Agro-processing industry that will brand our tea, coffee, floriculture, horticulture, dairy and fruit products and textile. This will not only create jobs, but will ensure our exports remain competitive in the global market. Furthermore, Kenya will increase her low-cost manufacture of basic industries and textiles for export to the region, to exploit the opportunities within the AGOA initiative, as well as focus on new markets in Africa, Asia, Europe and Latin America.
Automotive Industry
As a result of measures implemented in the recent past, Kenya has seen the return of inves-tors into the automotive industry. These have included Volkswagen, Peugeot, Toyota and others. The establishment of technical training and technology transfer mechanisms as part of the reinvigoration of the sector is a key building block. The Government in close engage-ment with stakeholders will complete the development of a Comprehensive Automotive In-dustry Development Policy for Kenya and finalize an actionable 10-year Automotive Industry Development Plan. With these interventions, the Government will be setting the automobile industry on a firm footing in order to enable it grow and create employment opportunities for the youth in Kenya and the region at large.
31st March 2017 | Ace Group | : Kenya Budget Speech Bulletin 2017
“Creating Jobs, Delivering a Better Life for All Kenyans”
Business Overview—continued
Tourism
The tourism sector has picked up with significant rise in conference activities and foreign tour-ist arrivals. To further realize the multiple benefits of a robust tourism sector, the Government working with key stakeholders in the industry will continue to promote and develop new areas of tourism including sports, beach and medical tourism. The Tourism Regulatory Authority (TRA) has also been established to ensure proper conduct of Tourism service providers and bring order to the industry. To support this sector, Ksh 1.0 billion is allocated for Tourism re-covery, Ksh 1 billion for sustaining new markets and sitting booths, Ksh 600 million for capital lending to hoteliers and Ksh 100 million for restoration of Fort Jesus, in Mombasa
Oil and Gas Sector
The early oil exploitation from Turkana oil fields will be started soon. This would be transport-ed via road as plans are finalised to construct an oil pipeline from Lodwar to Lamu. Very soon, Kenya will join the league of oil exporting Nations.
The Blue Economy – Ocean Fishing Industry
The Government has commissioned construction of an offshore patrol boat to deter illegal fishing activities along the shores of our waters which deny the country an estimated Ksh 10 billion annually.
Plans are also underway to develop designated fish ports at the coast to facilitate the landing of the catch by deep sea fishing vessels. Kenya has great potential to leverage its marine re-sources for purposes of creating wealth and employment. In this effort, the Government pro-poses a Coastal Fisheries Revival Package to facilitate primary, secondary and ancillary ma-rine fisheries processing/production. This package will include strengthened enforcement measures to curb illegal, unreported and unregulated fishing in Kenya’s Exclusive Economic Zone and support for a robust National Eat More Fish Campaign.
Konza Technopolis
Kenyan’s are set to benefit from the establishment of the Kenya Advanced Institute of Science and Technology (KAIST) at Konza Technopolis with the support of South Korea. The estab-lishment in Kenya of this world class Science and Technology Research University will en-hance the quality of higher learning while nurturing a technologically advanced population pro-ducing creative young talents.
Low Cost Housing
In the previous year a corporate tax incentive was introduced to encourage investors to enter into the housing sector by reducing the corporate tax rate for Developer’s who construct at least 400 units per year. This was meant to provide more decent low cost housing for the fast growing demand for houses in the urban areas. The Government will shortly be unveiling a comprehensive housing package that will incentivize the private sector to investing in low cost housing.
31st March 2017 | Ace Group | : Kenya Budget Speech Bulletin 2017
“Creating Jobs, Delivering a Better Life for All Kenyans”
Financial Services Sector
Islamic Finance
Islamic financing arrangements are becoming a major source of funding for
development expenditures worldwide. This financial arrangement is also getting integrated within the global financial system and has the potential to boost prosperity and raise the standard of living of our people. Kenya intends to maximize its comparative advantage and position itself as a regional hub for Islamic finance products, in order to attract foreign direct investment.
The government will propose legislative amendments to the Capital Markets Act, the Coop-eratives Societies Act and Sacco Societies Act to facilitate for shariah compliant finance products.
In addition, the Public Finance Management Act will be amended to provide for issuance of Sukuk bond (Islamic bond) as an alternative source of financing our development projects.
Tax statutes will be amended to provide for equivalent tax treatment of these new financial products with the conventional financial products.
Regulations to facilitate development of Takaful (Islamic Sharia Compliant) Retirement Ben-efits Schemes in Kenya, shall be introduced soon.
Retirement Benefit Schemes
A scheme covering employees from multiple employers has unique features that differ from ordinary occupational schemes and therefore needs a proper legal framework to regulate its operations. In this regard, the Umbrella Retirement Benefits Scheme Regulations have been prepared to govern the operations of Multi-employer Retirement Benefit Schemes.
Nairobi International Financial Centre
The Nairobi International Financial Centre Bill was approved by the Cabinet in December 2016, and has been submitted to the National Assembly for approval. The enactment of this bill will kick start the establishment of the Nairobi International Financial Centre to position Nairobi as an international financial hub.
Financial Services Authority
The Financial Services Authority (FSA) Bill which proposes to merge all non-bank fi-nancial sector regulators i.e. Capital Markets Authority, Insurance Regulatory Authority, SASRA etc., is currently undergoing legal drafting and will be submitted for approval.
31st March 2017 | Ace Group | : Kenya Budget Speech Bulletin 2017
“Creating Jobs, Delivering a Better Life for All Kenyans”
Taxation Measures – Customs and Excise
The EAC Common External Tariff which sets out the rates of duty applicable on imported goods is undergoing a comprehensive review and the final outcome will be released once adopted by the EAC Council of Ministers.
The Government has noted the huge potential for growth in the paint and
resin manufacturing industry for matching the high demand in the construction industry. Illumi-nating kerosene is a critical input in this sector. So as to promote paint and resin manufactur-ing, It is proposed to amend the Excise Duty Act to allow refund of excise duty paid on illumi-nating kerosene used in the manufacturing of paints and resin by registered manufacturers.
The Excisable Goods Management System has applied a uniform cost of
stamps irrespective of the cost of the various products. The uniform charge for the stamps has brought challenges in respect of low cost products. In order to enhance tax administra-tion, regulations that provide for differentiated prices based on the cost of the product will be gazetted shortly. Accordingly, the cost of stamps now ranges from Ksh. 0.50 to Ksh. 2.5 de-pending on the cost of the product.
In order to discourage the consumption of illicit drinks, the government has proposed 80% re-mission of excise duty in respect of locally manufactured beer made from locally produced sorghum, millet or cassava or any other produce, excluding barley. The consumption of high value spirits has increased tremendously. Accordingly, the government proposes to increase the tax rate of spirits from Ksh. 175 per litre to Ksh. 200 per litre. While the taxation of beer has not changed, the inflation adjustment that will be effected from 1st July, this year will in-crease government revenue in line with inflation. KRA will publish the new inflation adjusted tax rate for all excisable goods shortly.
There has been industry concerns on current taxation of cigarette in our country. The current single tax structure of Ksh 2,500 per mille of cigarette has been inequitable and has adversely affected demand for locally produced low value cigarette. To cushion the local cigarette man-ufacturers from the adverse financial effects due to loss in market, I have proposed a two tier tax structure of Ksh 2,500 per mille for cigarette with filters and Ksh 1,800 per mille for plain cigarette. This tax measure will ensure equity and fairness in the tobacco indus-try and prevent job losses in this sector.
Considering the hardship and the suffering associated with the recently declared national dis-aster as a result of the widespread drought in the country, white maize will be imported on a tax free basis for a period of four months.
In addition, the dates and in order to support our Muslim brothers, the importation of dates during the period of Ramadhan will be done free of taxes.
31st March 2017 | Ace Group | : Kenya Budget Speech Bulletin 2017
“Creating Jobs, Delivering a Better Life for All Kenyans”
Taxation Measures – VAT
The VAT Act, 2013 introduced 16% VAT on all imported inputs for pest control products for local processing/formulation while, the imported finished products remain zero rated. This treatment has made locally manufactured pesticides more expensive than imported products. In order to promote local manufacturers and reduce costs of production in the agricultural sector, It is propose to exempt VAT on all inputs used in the manufacture of pesticides
The tourism industry has been growing steadily despite adversities experienced in the industry. In order to promote tourism further and to make Kenya a tourism hub, It is proposed to exempt from VAT, locally assembled tourist vehicles. This measure has taken into consideration the current poli-cy of the Government to encourage local motor vehicle assembling. Tourist operators will therefore be encouraged to buy the tourist vehicles locally.
During the 2016 Budget in order to promote the health sector, VAT taxable goods used for construc-tion of specialized hospitals with accommodation by exempting from VAT. This was a noble initiative on the part of the Government, however this incentive excluded medical equipment and apparatus, thus making it unattractive to investors. In order to address the challenges in the health sector, It was proposed to extend the incentives earlier granted by exempting from VAT medical equipment and apparatus for use in the specialized hospitals.
VAT packaging materials and other inputs intended to support primary, secondary and ancil-lary marine fisheries and fish processing, are exempted from VAT.
It is the Government policy to increase and deepen the country’s sources of infrastructure financing. In order to achieve this, there’s need for the Government to support effective uptake of infrastructure financing products through tax neutrality for alternative measures for raising funds for such projects. It was proposed therefore to amend the VAT Act to exempt from VAT the transactions related to transfer of assets into Real Estate Investment Trusts (REITs) and Asset Backed Securities (ABS). (NB: This would include the Sukuk –Ijara a common Islamic Finance transaction, i.e. a finan-cial certificate backed by leased assets)
Ordinary bread and maize flour are VAT exempt, hence they do not benefit from deduction of input tax as it is inbuilt into their selling price. In order to make these commodities affordable for the com-mon Mwananchi, the Government proposes to zero rate bread and maize flour to remove VAT altogether. Manufacturers, Wholesalers, and Retailers who sell such goods will be expected to re-duce the prices of these basic commodities, failure to which, the government will reverse the policy.
Following the enactment of the VAT Act 2013, it was important that Regulations be developed to support the smooth implementation of the Act. The VAT Regulations have been prepared and sub-jected to stakeholders’ engagement as required. The
Regulations have been aligned to the Tax Procedures Act, 2015 which consolidated proce-dures that are common into one legislation. I will therefore be publishing the VAT Regula-tions to support the smooth implementation of the VAT Act, 2013.
31st March 2017 | Ace Group | : Kenya Budget Speech Bulletin 2017
“Creating Jobs, Delivering a Better Life for All Kenyans”
Taxation Measures – Income Tax
The government has proposed changes in the Capital Markets Act and Public Finance Man-agement Act to accommodate Islamic finance products to enhance financial deepening. Consequently, I further propose to amend the tax statutes to provide for equivalent tax treat-ment of these products with the conventional financial products.
To support the Blue economy, the government has proposed to allow a 150% investment de-duction allowance for capital expenditures in this sector.
Personal Taxation
The Income Tax Act is proposed to be amended to expand the tax bands by another 10% and to increase the personal relief by another 10%. The effect is to increase the number of low income earners exempt from tax by raising the lowest taxable income from Ksh. 11,135 per month to Ksh. 13,486. This measure will to a large extent increase the take home in-come of the majority of low income earners. In addition, It was conformed that the exemption on bonuses, overtime and retirement benefits paid to the low income earners will remain.
Motor Vehicle Assembly
Kenya is positioning itself as a hub for motor vehicle assembly for the region. In order to en-hance this position, It was proposed to amend the Income Tax Act to reduce the corporate rate of tax for new assemblers from 30% to 15% for the first five years. This measure will en-hance the return for new investors and increase job opportunities for Kenyans.
Special Economic Zones
It is the government’s policy to promote Foreign Direct Investment so as to expand the local economy and increase employment opportunities. To this end, It was proposed to amend the Income Tax Act to exempt dividends payable to non-residents by enterprises operating in Special Economic Zones (SEZ). In addition, to reduce the withholding tax on interest payable to non-residents by Special Economic Zones Enterprises from 15% to 5%.
Government proposes to amend the Income Tax act to allow enterprises licenced
under SEZ to deduct 100% of the investment cost of building and machinery. This will enable such enterprises to recover cost of investment within the first year of utilisation.
It was further proposed to amend the Miscellaneous Fees and Levies Act to
exempt from export duty and Import Declaration Fees respectively goods exported to and imported by an enterprise licenced under the SEZ Act.
These measures are meant to reduce the cost of doing business, inspire foreign direct in-vestment, position Kenya as a premier business hub and increase employment opportuni-ties.
31st March 2017 | Ace Group | : Kenya Budget Speech Bulletin 2017
“Creating Jobs, Delivering a Better Life for All Kenyans”
Taxation measures—Income Tax (continued)
Betting and Gaming
Betting and gaming have become widespread in our society in an environment that is inade-quately regulated. Its expansion is beginning to have negative social
effects, in particular on the young and vulnerable members of our society, the government, therefore proposed to raise taxes for betting, lottery, gaming and competition from the current rates of 7.5%, 5%, 12% and 15%, respectively, to a uniform tax rate of 50% for all categories. The proceeds will be put in the newly created National Sports, Culture and Arts Fund to sup-port development of sports, culture and arts in Kenya.
Review of the Income Tax Act.
Among the issues received for review include taxation of capital gains, compensating tax, taxation of pensions, taxation of extractive industries and taxation of cross border transac-tions, among others. We intend to address these issues during the overhaul of the current In-come Tax Act, which we have already commenced.
The draft Income Tax Act is expected to be published shortly for public input in accordance with the Constitution. Specifically, the new Income Tax Act is expected not only to simplify the administration of the Act, but also to reduce the cost of compliance by taxpayers. The re-view is also guided by the need to expand the tax base and to align the Act with the best practice and ensure certainty in the tax law.
Tax Amnesty
Last year, a tax amnesty was introduced for taxpayers willing to reinvest back home provided there was a conducive environment to facilitate such reinvestment. The government has not-ed that there is need to clarify the circumstances under which the amnesty will be granted.
Consequently, taxpayers willing to enjoy amnesty should declare the income for year 2016, file return and accounts for year 2016 by 30th June, 2018 and transfer back to Kenya the funds voluntarily declared under the amnesty. KRA to issue guidelines on the same and urge taxpayers to cash in on this amnesty and clean up their records with KRA.
Tax allowable donations – alleviation of distress during national disaster
As we are aware, our country has faced challenging times as a result of drought. The Gov-ernment has put in place measures to ensure that the impact of this disaster on the people of Kenya is alleviated. In addition, It is proposed to amend the Income Tax Act to allow a deduc-tion for expenditure incurred on donations for the alleviation of distress during national disas-ter as declared by the President. Such donations should be channelled through the Kenya Red Cross, a County Government or any other institution responsible for national disaster
31st March 2017 | Ace Group | : Kenya Budget Speech Bulletin 2017
“Creating Jobs, Delivering a Better Life for All Kenyans”
Youth and Women
To continue supporting our youth and women, the Government has allocated Ksh 18.3 bil-lion towards the youth empowerment programme which will help facilitate mentor-ing of youth on leadership, national values, and entrepreneurship skills and further en-trench digital literacy.
In addition, the Government has allocated Ksh 0.6 billion for the Youth Enterprise Devel-opment Fund; and Ksh 0.7 billion for Youth Employment and Enterprise (Uwezo Fund) and Ksh 0.8 billion for Women Enterprise Fund.
For purposes of ensuring sustainable promotion of local industry, all foreign tenderers par-ticipating in international tenders will be expected to source at least 40% of their supplies from Kenyan citizen contractors. This will enhance the competitiveness of the SMEs, spur economic growth and enhance job creation which will help in addressing the unemploy-ment challenge.
31st March 2017 | Ace Group | : Kenya Budget Speech Bulletin 2017
“Creating Jobs, Delivering a Better Life for All Kenyans”
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