Published On: Fri, Mar 27th, 2020

Kenya : Economic measures to mitigate impact of COVID19

As Corona Virus continue to spread across the globe, Kenya has taken various preventative measures to prevent the spread of the virus and at the same time protect the economy. The country will go on partial lockdown from Friday 27th March which runs from 7PM to 5AM daily. The country has recorded a decline in business activity therefore affecting the economy of the country with sectors like Tourism, FMCG ,Financial services, Logistics suffering losses. 

Employment opportunities for many in the country remain uncertain, with many businesses struggling to fulfil contractual obligations. The Government in an effort to mitigate the economic effects of the pandemic last week cut rates to 7.25% and reduced cash reserve ratio to 4.25%

Further, the president announced some tax relief to increase liquidity in the country.
Pay As You Earn (PAYE)

The President has directed a one hundred percent (100%) Tax Relief for persons earning gross monthly income of up to KES 24,000 and reduction of the highest PAYE rate from thirty percent (30%) to twenty five percent (25%).

This is a good move in ensuring that a taxpayer who earns salary goes home with more disposable income. This will help sustain the common mwananchi in the coming hard times. This directive will however only come into force pursuant to a tax amendment bill being tabled in parliament and the same being enacted.
 
Value Added Tax (VAT)

The President further directed an immediate reduction of the standard VAT rate from sixteen percent (16%) to fourteen percent (14%), effective 1st April, 2020. The Cabinet Secretary in exercise of his powers under section 6 of the VAT Act has issued Legal Notice Number 35 of 2020 dated 26th March 2020 in terms of the aforesaid directive, which is pending approval by Parliament.

The Kenya Revenue Authority (KRA) was also directed to expedite the payment of all verified VAT refund claims amounting to KES 10 Billion within three (3) weeks or in the alternative to allow for offsetting of Withholding VAT, in order to improve cash flows for businesses in the economy. We must emphasise this VAT Refund Claim only applies to claims that have been verified by KRA and does not extend to contested claims.

Turnover Tax (TOT)

Reduction of the TOT rate from the current three percent (3%) to one percent (1%) for all Micro, Small and Medium Enterprises (MSMEs). The TOT was reintroduced by the Finance Act, 2018. This will provide a major reprieve to taxpayers – entities whose turnover is less than KES 5 Million in a year of income.

Export Processing Zone (EPZ) Enterprises

Further to Presidential directives, the Cabinet Secretary for National Treasury and Planning, on 20th March, 2020, had issued a notice to the Commissioner General of KRA asking that it lifts restrictions of twenty percent (20%) of the total annual production of the EPZs for sale into the domestic market to one hundred percent (100%) with an undertaking that the government pays the dues and taxes to KRA given that there is no legal provision exempting goods from EPZs sold locally from taxes.

The tax and dues payable by taxpayers in the EPZs are charged under the 13th Schedule of the Income Tax Act and the EPZ Act, 1990.  This Presidential directive will allow entities in the EPZs to supply locally all their products in Kenya.

While the move is welcomed and the idea of the government paying taxes and dues on behalf of tax payers to KRA may be economically sound, the same goes against the basic agency principle of ‘a principal being estopped from purchasing its own goods from its agent’. However, it must be noted that this is a temporary measure, pending parliamentary amendments to the law to allow for exemption of EPZs.

Source: Oraro  & Co and additional reporting from GBS Africa.

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