VAT on Exported Services

News

Background of the Case

The Finance Act 2022 amended the VAT Act by deleting exported services from the exempt list (First Schedule). This therefore meant that exported services became vatable at 16% excluding those relating to business process outsourcing “BPO” services effective from 1st July 2022. As a result, a consolidated petition was lodged at the High Court. The petitioners specifically wanted the amendments to the VAT Act (as contained in the Finance Act 2022) to be declared unconstitutional as they did not undergo public participation amongst other prayers.

Court Ruling

The Court Ruled that the Finance Act 2022 went through public participation and that it did not violate the Constitution. It further ruled that charging VAT on exported services would not amount to double taxation as had been argued by some of the petitioners. This in effect means that exported services are vatable at 16% with an exception of those in respect of business process outsourcing (BPO); which are zero rated.

What this Means for you

The VAT Act does not define what BPO is and this has led to various interpretation by taxpayers. One of the definition that has frequently been used is contained in the Special Economic Zones Act (“business processing outsourcing” means the provision of outsourcing services to business for specific business functions or processes such as back office support services in human resources, finance, accounting and procurement amongst other services.) It is therefore prudent that you review the exported services offered and see whether they fall under the ambit of this definition otherwise, they become vatable at 16%. Alternatively, taxpayers can seek the interpretation of KRA with regards to the applicability of this section through a private ruling. It is also interesting to see whether KRA will demand back taxes from those companies who had not charged VAT pending a determination of the Court.

NSSF New Rates 2023

News

Following the court of appeal decision on 3rd February 2023 where the National Social Security Fund (NSSF) Act No 45 of 2013 was upheld, NSSF have through a press release on the 9th February 2023 asked all employers to comply with the law in regard to the contribution rates with immediate effect.

The rate of contribution rate is 12% of pensionable earnings split in half, with 6% coming from the employee and 6% coming from the employer.

A ceiling limit of Ksh. 2,160 applies to employees earning KES 18,000 and above. The employee will pay Ksh. 1,080, and their employer will match it.

Employers who have already processed their February 2023 payrolls will need to amend their payrolls to reflect the changes and remit the NSSF contributions by the 9th of March 2023.

Payroll Changes As per The Finance Act 2023

News

The Finance Act 2023 was signed into law on 26th June 2023. It brought several amendments to laws relating to various taxes and duties; However, the High Court temporarily suspended its implementation pending the hearing and determination of the petition(s) before it;

The Treasury Cabinet Secretary moved to the appellate court requesting the lifting of the conservatory orders; and The Court of Appeal in its ruling delivered on 28 July 2023 lifted the conservatory order thereby setting the stage for the implementation of these tax changes as contained in the Finance Act. We have highlighted below the changes, which will affect payroll processing for the month of July 2023 and its impact on employees earnings.

Expanded tax bands

  • Two additional tax bands have been introduced above the current upper tax rate of 30%;
  • Individuals earning monthly incomes between KES 500,000 and KES 800,000 will be taxed at 32.5%;
  • Employees earning incomes of more than KES 800,000 will be taxed at 35%;
  • The effect of this is that the take-home pay for employees whose taxable pay fall in between KES 500,000 to KES 800,000 will reduce.
Taxable Amount – Annual Taxable Amount – Monthly Rate
On the first KES 288,000 On the first KES 24,000 10%
On the next KES 100,000 On the next KES 8,333 25%
On the next KES 5,612,000 On the next KES 467,667 30%
On the next KES 3,600,000 On the next KES 300,000 32.5%
On incomes above KES 9,600,000 On incomes above KES 800,000 35%

 

Affordable Housing Levy

  • Section 31B of the Employment Act has been amended requiring employers to deduct and remit a levy known as the Affordable Housing Levy at the rate of 1.5% of the employee’s gross monthly salary with employers contributing a similar amount;
  • This levy will be required to be remitted not later than 9 working days after the end of the month; and
  • Unpaid amounts will attract a penalty of 2% of the amount due for each month the payment remains unpaid

Mileage Reimbursements

  • Amounts paid to employees as mileage reimbursements at the standard mileage rate approved by AA Kenya will be a tax free benefit; and
  • Excess amounts over and above the AA Kenya approved rates will be taxed on the employees through the payroll.

Conclusion

With the lifting of the conservatory order, it is advisable that all employers are required to re-run the July 2023 payrolls and effect the above changes to avoid penalties and interests. The resulting overpayment to employees in the month July 2023 can be deducted in the August payroll or the employer can agree with the employees on how to recover the same. Should you require any clarity on the above, kindly contact our payroll service Team.