Tax Exemptions and Reliefs:
New provisions have introduced a full tax exemption on gratuity payments, as well as mortgage interest relief for individuals constructing their own homes. The Act now allows for the possibility of a construction mortgage, enabling individuals to claim interest deductions on loans obtained for the construction, purchase, or improvement of their primary residence, provided that the property is not intended for rental purposes.
However, there are some restrictions to note. The deduction applies to only one residential property. If the homeowner occupies the property for less than a year, the deduction will be reduced proportionally. Additionally, the cap of KES 360,000 still applies, which limits the relief for high-value mortgages.
This change aims to enhance housing affordability for middle-income earners who are investing in construction. However, the deduction limit is too low to effectively offset costs in our current high-interest environment. Furthermore, restricting eligibility to loans from only six institutions may limit access for some borrowers.
Support for Businesses:
The Act permits businesses to deduct the entire cost of eligible industrial and operational items—such as linen, tools, and other equipment— in the year they are purchased, instead of spreading the deduction over three years.
This provision is designed to lessen the tax burden on businesses and promote investment in new tools and equipment.
The Act provides compensation for labor costs for companies that hire first-time employees under the age of 29, available for up to 12 months.
These provisions aim to foster a positive environment for business growth, investment, and to address unemployment while promoting economic participation among young people.
Digital Marketplace Taxation:
The Act makes a significant amendment to Section 2 of the Excise Duty Act, expanding the definition of a "digital marketplace" to include any online platform that allows users to sell goods or offer services to one another. Furthermore, according to Section 13(2), the Act subjects services provided over the internet, particularly by non-resident entities, to excise duty. As a result, the law now includes websites, apps, and online services used for peer-to-peer sales, freelancing, and business transactions.
While this move aims to increase tax revenue from the expanding digital economy, it raises an important question: Is excise duty the appropriate type of tax for this context?
Faster Tax Refunds:
The Act proposes changes to expedite refunds and reduce tax disputes. This will ensure greater availability of funds for businesses and the government to enhance public service delivery.
Digital Asset Tax:
The digital asset tax rate is reduced from 3% to 1.5%.
Minimum Top-Up Tax:
The Minimum Top-Up Tax, which will be introduced in 2024, must be paid by the end of the fourth month following the end of the income year. This deadline aligns with the standard due date for balancing tax payments.
Changes to Significant Economic Presence Tax (SEPT):
The act repeals the Ksh 5M threshold for SEPT and expands its scope to include businesses operating online.
Limitation of offset period for tax losses:
The Act restricts the carryforward of tax losses to a maximum period of five years. This means that taxpayers can only deduct losses incurred in a particular tax year for up to five years after the year in which the loss occurred. Previously, tax losses could be carried forward indefinitely.
This change in tax law will affect investors in capital-intensive industries, who may find it challenging to use their tax losses within the new five-year timeframe.