Tax laws amendment bill – effect on cost of living.

The government tabled the Tax Laws (Amendment) Bill, 2018 in parliament on 10^th April 2018. The bill has gone through the first reading and committee stage and is expected to be presented in parliament soon. The bill contains a raft of measures including introduction of withholding tax on winnings from betting and gaming, increasing the reliefs for home ownership and exempting some products that were initially zero rated by the VAT Act 2013.

The proposed changes have a great magnitude on the cost of living and the regulation of the betting industry that has ballooned in Kenya in recent years. The aim of the government is to benefit from this growth through additional tax collections.

Firstly the bill seeks to amend the Income Tax Act by introducing a Withholding Tax (WHT) of 20% on the winnings received by resident and non-resident persons from betting and gaming. Kenya has become a betting paradise and the figures from the Betting Control and Licensing Board (BCLB) are mind boggling. Data from BLCB shows that in 2015, betting and gaming operators netted income of KShs 19,432,872,708 out of which they paid out winnings of KShs 14,969,627,825. This caught the attention of the tax man and WHT was introduced in 2015. However, this did not take off as implementation of the tax became an uphill task. This was shelved.

In 2016, the returns skyrocketed to KShs 97,832,148,096 out of which KShs 81,662,678,803 was paid out to the winners. The government in response introduced a tax of 35% on the gaming and betting operators’ revenue. There was an uproar from the sector which saw the operators withdraw from sports sponsorships and charities in a bid to force the government to back down. The government has given in hence the proposals to reduce the tax on the operators to 15% and introduction of the WHT on the winnings.

While it is clear that the industry has to be taxed, some of the questions that arise are on the fairness of the tax and the practicability of implementing the tax. It should be noted that before the punters win from the bets and games, they would have suffered losses in the past. Therefore in the interest of fairness, KRA should impose the tax on the income received by the punters as opposed to the winnings. One of the proposals put forward is that on a monthly basis an analysis is done on the winnings and losses for the month and WHT charged where the difference is positive.

Further, the WHT should be imposed on income above a certain threshold. Winnings come in all amounts from KShs 20 to millions. Accounting for the WHT on such small amounts is not tax efficient and hence a threshold should be introduced. In addition, a greater percentage of the recipients of the winnings are individuals some of who do not have Personal Identification Numbers (PINs). Withholding on such individuals on i-Tax will be impossible. In this regard exemptions should be made for the requirement of PIN numbers in accounting for this tax.

The departmental committee on Finance and National Planning has proposed the change in definition of winnings to take into account the losses made by the punters. Further they have proposed to reduce the WHT rate from 20% to 10% in addition to removing the requirement for punters to have PIN numbers. We hope that this time round, KRA has addressed the bottlenecks experienced previously in implementing this tax.

Secondly, the bill proposes to move a number of items that are currently listed as zero rated to the exemption schedule. The major reason for this is that the government wants to restrict zero rating to exports. KRA’s argument is that VAT is a consumption tax and hence it’s borne by the final consumer of the goods. In this regard, since exports are consumed outside the country, the VAT cannot be charged on them and hence they are zero rated and any VAT on them is refunded. This move seeks to reduce the VAT refund burden that has dogged the taxman for a very long time.

To understand the impact of this move, it is important to understand how the zero rating and exemption regimes works. When a good or service is exempted, the supplier of such a good or service does not charge VAT on the good or service but cannot claim the VAT that he is charged on his supplies.

Consequently the supplier will pass that VAT to the final consumer. On the other hand, when a good is zero rated, the supplier charges VAT at 0%. Further the supplier is able to claim the VAT that he is charged on his purchases hence the net effect is almost zero hence this reduces the price of the good or service.

The bill has proposed to move maize and wheat flour, milk, LPG gas and medicaments from the zero rated status to the exempt status. These products had just been zero rated in last year’s budget in a bid to ease the cost of living. The exemption of these products will increase the cost of the products since the suppliers in these industries will not claim for a refund on the VAT suffered on their purchases. They will now pass this VAT as a cost to the final consumer. This will negate the very reason why they were zero rated in the first place.

The greatest opposition has come from the pharmaceutical industry. They contend that medicines forms over 40% of patients’ hospital bills. Exempting the medicaments and the inputs used in the manufacture of such medicaments will push the prices of medicines up and consequently the cost of healthcare. This will in effect torpedo the government’s effort to provide universal affordable healthcare which is one of the pillars of the Big Four agenda.

Further, pharmaceutical manufacturers contend that the increase of the prices of inputs used in manufacture of medicines will make imports cheaper and hence render the local manufacturers uncompetitive.

The house committee has proposed to drop the planned amendment of exempting the various items as observed above so as to continue easing the pressure on cost of living. If adopted by parliament, suppliers of the products will continue enjoying the zero rated status and hence can claim VAT refunds from KRA.

Thirdly the bill has proposed to double the relief for home ownership from the current KShs 4,000 to KShs 8,000 per month or KShs 96,000 annually. Further the bill proposes to remove the stamp duty on purchase of homes for first time home owners. This is a welcome move especially now that the official house deficit stands at over 2 million units.

To enhance this further, government should seek to remove some of the bottle necks that face home ownership in Kenya. Mortgage rates are still very high beyond the reach of many ordinary Kenyans. Treasury proposed the formation of the Kenyan Mortgage Refinancing Company which aims at providing funding at lower rates with the hope that this will increase the uptake of mortgages.

The other challenge has been the bureaucracy of approving building plans and capacity constraints when it comes to valuations. Currently, valuation is only done by the Chief Government Valuer who has a paltry 44 valuers carrying out all the valuation in the entire country. This is in stark contrast with the over 600 professionally registered valuers that can assist in removing this bottleneck.

The departmental committee has proposed to include the private valuers in provisions of the valuation services for home owners so as to help in easing the process. They have further proposed to introduce an affordable housing relief that shall be applicable to resident person who acquires a house under an affordable housing scheme. The amount of relief shall be 15% of the gross emoluments or KShs 108,000 per annum whichever is lower.

It’s important to note that the income tax bill that will be tabled in parliament has eliminated the Home Ownership Savings Plan (HOSP) relief. In addition, the income tax bill has not acknowledged the affordable housing relief as proposed by the Tax Laws (Amendment) bill. If the Income Tax bill will be passed as is, then the proposal by the amendment bill will be overtaken by events.

In order to achieve the agenda on housing, the bill has proposed to exempt licensed Special Economic Zone (SEZ) operators, developers and enterprises from VAT on materials for the construction of a minimum of five thousand housing units. Further, the bill proposes to exempt the SEZs from capital gains tax and compensating tax. The purpose of the exemptions is to ensure that the impact of the tax incentives provided to the SEZs is not lost at the point of distribution of dividends to the investors.

The proposed amendments to the bill will be tabled in parliament hence we wait to see whether they will be adopted or not. Further we shall also be keen to see the interaction between these proposals and the treasury proposals through the finance bill 2018.

By Nathan OmayioNathan is a Senior Tax Consultant at Andersen Tax, Kenya.

Email: nomayio@nexusafrica.co.ke