Finance Act, 2023

The President signed into law the Finance Act, 2023 (Act) on 26 June 2023. The Act was subsequently gazetted on 27 June 2023. While a majority of the changes will take effect from 1 July 2023, a few others will take effect on 1 September 2023 and 1 January 2024.

The Act, which the President has described as a strategic answer to the difficulties the country faces, aims to generate additional revenue to meet the government’s KES 3.6 trillion budget. This amount excludes about KES 800Billion in principal debt repayments that will come due during the year.

The Act introduces fundamental changes to Kenya’s tax and social contributions regime. One such change is the introduction of a Housing Levy, which requires both employers and employees to contribute to the National Housing Development Fund. While the Finance Bill, 2023 had proposed that the contributions be refundable or be used to finance purchase of houses under affordable housing, the legislated change is a non-refundable levy of 1.5% payable by both the employer and employee.

Another significant change is the introduction of new PAYE tax bands. The Act has adopted a new tax band of 32.5% for income between KES 500,000 and KES 800,000 and 35% for income exceeding KES 800,000. Few people earn income in this range and it will be interesting to see the impact the change will have on tax collections.

The increase in VAT on petroleum products (excluding LPG gas) from 8% to 16% is expected to impact the cost of living due to its use in many sectors of the economy.

Exportation of services will now be taxed at 0%, this is a welcome move as it aligns the VAT treatment on export of services with international norms and standards.

Another change that has sparked significant debate is the requirement to remit withholding tax to the Kenya Revenue Authority within a 5-day period. While the government is under pressure to enhance tax collection, the increased administrative burden associated with this provision was not adequately considered.

While the government is facing fiscal constraints and requires revenue to meet it expenditure objectives and settle debts that are coming due, it remains to be seen whether the government interventions will create employment opportunities and spur growth in the manufacturing and agricultural sectors which have lagged over the last few years.

We provide in the ensuing pages our in-depth analysis of the Finance Act, 2023.

KPMG is happy to assist on any issues arising from the Finance Act, 2023.