Types of Taxes in Kenya, Cost, and How to Comply
Learn about the different types of taxes in Kenya, understand your tax obligations, and ensure compliance for individuals and businesses
Taxes are a fundamental part of any nation's economy. They play a pivotal role in financing public expenditures, supporting government functions, and ensuring the welfare of citizens. Like many other countries, Kenya has a diverse tax system that includes various types of taxes. Now allow me to take you through the different types of taxes in Kenya, their associated costs, and how individuals and businesses can comply with tax obligations.
- Kenya has various types of taxes, including income tax, rental income tax, VAT, excise duty, CGT, agency revenue, and turnover tax.
- Compliance with tax regulations is essential for individuals and businesses to avoid penalties and contribute to the country's revenue.
- Registering with the Kenya Revenue Authority (KRA), maintaining accurate records, and filing tax returns on time are crucial steps in tax compliance.
- Understanding available tax credits, such as personal and insurance relief, can help reduce tax liability.
- Taxes in Kenya have evolved, reflecting changes in the country's economic landscape and government policies.
The Kenya Revenue Authority (KRA) serves as the government's arm responsible for collecting taxes in Kenya. Established by an Act of Parliament in 1995, KRA's primary function is to assess, collect, and account for all revenues by written laws. Here, we'll delve into the various tax categories individuals and businesses encounter in Kenya.
1. Income Tax
Income tax is a fundamental component of Kenya's tax system. It is charged annually on the income of individuals, whether they are residents or non-residents if the income is accrued in or derived from Kenya. Income tax applies to various sources of income, including:
- Business income from trade or profession
- Employment income
- Rental income
- Dividends and interests
- Pension income
- Income from a Digital Marketplace
- Natural resource income, among others
To ensure compliance, the government has established different methods for collecting income tax from companies and partnerships based on their income sources.
2. Corporation Tax
Corporations tax is levied on corporations such as Limited companies, Trusts, and Co-operatives. Companies based outside Kenya but operating in Kenya or having a branch in Kenya pay Corporation Tax on income accrued within Kenya only.
3. Pay As You Earn (PAYE)
PAYE is a method of collecting tax at source from individuals in gainful employment. Companies and partnerships with employees must deduct tax according to prevailing tax rates from their employees' salaries or wages on each payday for a month and remit it to KRA on or before the 9th of the following month.
4. Withholding Tax (WHT)
Withholding tax (WHT) is deducted at the source from specific types of income, such as interest, dividends, royalties, and more. Companies and partnerships making these payments are responsible for deducting and remitting the tax to the Commissioner of Domestic Taxes.
5. Advance Tax
Advance tax is paid before a public service or commercial vehicle goes for the annual inspection.
6. Installment Tax
Instalment tax is paid by persons with tax payable for any year amounting to Kshs. 40,000 and above.
7. Rental Income Tax
Rental Income Tax is levied on income from renting out property for residential or commercial purposes. Agents appointed by KRA withhold a percentage of the gross rent as tax.
8. Value Added Tax (VAT)
Value Added Tax (VAT) is charged on the supply of taxable goods or services made or provided in Kenya and on the importation of taxable goods or services into Kenya. Companies and partnerships must register for VAT if their annual revenue exceeds Kshs. 5,000,000.
9. Excise Duty
Excise Duty is imposed on various goods and services, including mineral water, juices, soft drinks, cosmetics, mobile cellular phone services, and more. Companies and partnerships dealing in excisable goods and services must pay excise duty.
10. Capital Gains Tax (CGT)
Capital Gains Tax (CGT) is chargeable on gains from the transfer of property in Kenya, whether acquired before or after January 1, 2015.
11. Agency Revenue
Agency Revenue includes taxes collected on behalf of other revenue collection agencies in Kenya, such as Stamp Duty and Betting Tax.
12. Turnover Tax (TOT)
Turnover Tax (TOT) is a tax charged on gross sales of a business. It is payable by resident persons whose gross turnover from business is more than Kshs. 1,000,000 and does not exceed Kshs. 50,000,000 in any given year.
Cost of Compliance
Compliance with tax regulations is crucial for individuals and businesses. The costs of compliance include:
- Hiring tax professionals or accountants for accurate tax calculations and reporting.
- Deducting and remitting taxes at source, such as PAYE and withholding tax.
- Keeping accurate records of income, expenses, and taxes paid.
- Filing tax returns on time to avoid penalties and interest charges.
How to Comply with Tax Obligations
Compliance with tax obligations is crucial for individuals and businesses in Kenya. Here are some key points to ensure you meet your tax responsibilities:
- Register for a PIN: Individuals and companies must have a Personal Identification Number (PIN) to pay taxes in Kenya. You can obtain a PIN from KRA.
- File Returns: Taxpayers, including employees, business owners, and companies, should file annual returns with KRA. This process helps the tax authorities assess your tax liability accurately.
- Keep Accurate Records: Maintain organized financial records to support your tax returns. This includes keeping records of income, expenses, and relevant documents.
- Pay Taxes Timely: Adhere to tax payment deadlines to avoid penalties and interest charges. Different taxes have varying due dates, so stay informed.
- Seek Professional Advice: Consider consulting a tax professional or accountant for guidance for complex tax matters or when in doubt.
- Use Online Platforms: KRA offers an online platform called iTax for tax registration, filing returns, and making payments. Utilize this platform for convenience and efficiency.
Taxes are an essential part of any nation's fiscal policy, serving as a critical source of government revenue. In Kenya, the Kenya Revenue Authority plays a pivotal role in collecting various taxes, including income tax, VAT, excise duty, and more. Compliance with tax obligations is essential for individuals and businesses to ensure the sustainability of public services and infrastructure development.
Frequently Asked Questions (FAQs)
Who collects taxes in Kenya?
The Kenya Revenue Authority (KRA), the government's official agency responsible for revenue collection, collects taxes in Kenya.
What is the penalty for late tax filing in Kenya?
The penalty for late tax filing in Kenya varies depending on the tax type. For example, the penalty for late filing of Turnover Tax (TOT) returns is Kshs—1,000 per month (effective April 25 2020).
How can I obtain a Personal Identification Number (PIN) in Kenya?
You can obtain a PIN in Kenya by applying through the KRA website or visiting the nearest KRA office.
What is the purpose of Value Added Tax (VAT) in Kenya?
VAT is a consumption tax in Kenya charged on the supply of taxable goods and services. The consumer of the goods or services ultimately pays for it.
Is it mandatory to register for VAT in Kenya?
Companies and partnerships in Kenya must register for VAT if their annual revenue exceeds Kshs. 5,000,000.
What is the tax rate for Corporation Tax in Kenya?
Resident companies in Kenya are subject to a tax rate of 30%, while non-resident corporations pay 37.5% on all taxable profits.
Can I offset taxes paid in another country against my Kenyan tax liability?
Yes, taxes paid in another country on employment income by a Kenyan citizen can be offset against tax payable on that income in Kenya up to the maximum tax payable in Kenya on the said income.
What is the role of the Kenya Revenue Authority (KRA)?
KRA's core functions include assessing, collecting, and accounting for all revenues by written laws. They also provide advice on tax matters and perform other functions related to revenue as directed by the Minister.