Types of taxes in Kenya

By Hope Huntley 3 years ago

A tax is a mandatory financial charge or other type of tax levied on a taxpayer (an individual or a corporation) by a government agency to finance various public expenditures. In Kenya, the Kenya Revenue Authority (KRA) is responsible for the assessment, collection and accounting of all revenues due to the government. Generally, the taxpayer incurs two forms of taxes; direct taxes and indirect taxes. A direct tax, such as income tax, is levied on the income or profits of the person paying it. On the other hand, indirect taxes are generated when you purchase goods or services.

Learn more: Kenya EOR

Here are the different types of taxes:

  1. Income tax

Income tax is a direct tax imposed on all income of a person, whether resident or non-resident, that is earned or derived in Kenya.

Income tax is imposed;

  • Business income from any trade or profession
  • Employment income
  • Rental income
  • Investment income
  • Income from services rendered among others
  • Pensions among others

There are different methods of collecting income tax from corporations and partnerships, depending on their sources of income.

  1. Corporate Income Tax

This is a form of income tax that is levied on legal entities such as limited liability companies, trusts and cooperatives on their annual income. Companies that are based outside Kenya but operate in Kenya or have a branch in Kenya pay corporate income tax only on income earned in Kenya. The tax rate for resident companies is 30% and 37.5% for nonresident companies on all taxable profits.

  1. Pay As You Earn (PAYE)

This is a method of collecting tax at source from persons engaged in gainful activity. Corporations and partnerships with employees are required to deduct tax at the prevailing tax rate from their employees’ wages each payday for a month and remit it to KRA by the 9th of the following month.

  1. Withholding Tax (WHT)

This tax is deductible from certain categories of income when making a payment to non-employees.

WHT is deducted at source from the following sources of income:

  • Interest
  • Dividends
  • Royalties
  • Management or professional fees (including consulting, agency or contract fees)
  • Commissions
  • Pensions
  • Rent received by non-residents
  • Other specified payments

The companies and partnerships making the payment are responsible for deducting and remitting the tax to the Commissioner of Internal Revenue.

  1. Tax Advance

This is a tax paid in advance before a public service vehicle or commercial vehicle is subject to annual inspection. It applies to public service vehicles before they are registered as commercial vehicles. The rates for sedans, minibuses, family cars and coaches are Ksh 60 per passenger per month and Ksh or Ksh 720 per passenger per year. While for vans, pickups, trucks and trucks are Ksh 1,500 or Ksh 2400 per ton of load capacity per year.

  1. Instalment Tax

Instalments are paid by persons who have a tax liability for any year in an amount equal to or greater than Ksh 40,000.

  1. Tax on rental/residential income

This is a tax levied on rental income received from the rental of a property. The taxation of rental income depends on whether the rented property was used for residential or commercial purposes. Corporations and partnerships that rent property to others for residential or commercial use are required to pay income tax on the 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.

According to the Finance Act 2015, the tax payable on residential property income in Kenya is set at a maximum of Ksh 10 million per year of income. The rate is 10% of the total gross monthly rent, payable before or on the 20th of each month.

  1. Value Added Tax (VAT)

Value Added Tax is levied on the supply of taxable goods or services made or provided in Kenya and on the importation of taxable goods or services into Kenya. While businesses and partnerships can voluntarily register for VAT, they MUST register if their annual revenue exceeds Kshs 5,000,000. To facilitate compliance, the KRA appoints agents to withhold and pay VAT on supplies made. These agents can be verified via the agent checker on iTax.

VAT is applied as follows.

  • 16% – for all taxable goods and services
  • 0% – for specific groups of goods and services
  1. Excise duty

This is an imposed excise duty;

  • goods manufactured in Kenya
  • imported into Kenya and specified in Schedule 1 of the Excise Duty Act, 2015.

Businesses and companies trading in excisable goods and services are required to pay excise duty. The list and types of excisable goods and services are listed in Schedule 5, read in conjunction with Section 117 (1) (d) of the Customs and Excise Act, CAP 472 Laws of Kenya. They include:

  • One bottle of mineral water per person.
  • Juices, soft drinks
  • Cosmetic products and hair preparations
  • Other beer made from malt
  • Opaque beer
  • Cell phone services
  • Fees charged for the transfer of money, etc.
  1. Capital Gains Tax (CGT)

This is a form of income tax that is charged on a net gain that a business realizes after the sale of land or a building.

  1. Agency Income

This is a type of payment that KRA collects on behalf of various revenue collection agencies in Kenya.

The two types of agency income include:

  • Stamp duty
  • Stake and Pool Tax
  1. Stamp duty

Stamp duty is a tax levied on transfers of property, shares and stocks. It is collected by the Ministry of Lands, which has seconded this function to the Kenya Revenue Authority (KRA).

  1. Stake and pool tax

This is a tax levied on winnings from betting, gaming and lottery activities. Betting, gaming and lottery companies are required to withhold as tax and pay to KRA, a percentage of the winnings paid to winners.

  1. Customs Duty

Customs duty is a tariff or tax imposed on goods when they are transported across international borders. The KRA has 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 the duties and tariffs of the East African Community (EAC) common external tariff. Tariffs vary from good to good. For imports, an import declaration fee of 2.25% of the cost, insurance and freight is charged. The customs department will then inform you of the duties payable. In general, customs duties are levied at rates ranging from 0% to 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, duties and other applicable taxes.

  1. Property Tax

This is a tax levied on land or land improvements (buildings) by the respective county governments. It is indexed to the value of the property and its location. It varies from county to county.

  1. Entertainment Tax

This type of tax is applied to entertainment activities, for example; concert tickets, hosting an event in a theater or studio.