Revenue and relief: Balancing the scales between an expanded national tax base and protecting the citizenry from a high cost of living

Taxes constitute the largest source of government income and the Kenya Revenue Authority (KRA) is assigned the task of revenue collection. The country has experienced a boom in the construction sector over the last few years, but this has not led to a proportionate growth in tax revenue generated by rental income. Various measures have been put in place to encourage voluntary compliance by landlords, unfortunately with limited success. The government has thus changed their approach to taxing construction activities, informed by sector-specific challenges such as the high cost of monitoring compliance and the lack of proper mapping of properties across the country.

New Measures

Various legislative changes have been enacted to encourage voluntary compliance, such as simplified taxation measures, particularly for small-scale landlords. In addition, a tax amnesty period targeting individuals was introduced on rental income to address taxes, penalties and interest in any period before or during the 2013 income year, as well as penalties and interest related to the 2014 and 2015 reporting years. The amnesty was applicable as long as the tax returns or amended returns for 2014 and 2015 were submitted and the due tax paid on or before the end of June 2016. It also allowed a deduction of 40% of rental income for landlords who did not have proper documentation to support their related expenditures.

This was followed by the introduction of a residential rental income tax. This is applicable on resident persons who earn residential rental income in Kenya that is in excess of KSh144,000 ($1410) but does not exceed KSh10m ($97,600) during any year of income. This is a monthly tax payable on or before the 20th of the following month at a rate of 10%. Applicable persons can elect to opt out of this residential rental income tax and remain subject to the conventional income tax rules.

In a bid to bring large-scale residential landlords into the tax net, withholding tax was introduced on rental income paid by KRA-appointed agents. A person appointed as an agent will be obliged to withhold 10% of the gross rent payable (excluding value-added tax) due to their landlord and remit it directly to the KRA. The appointed agents are mainly tenants who operate a chain of stores or offices such as supermarkets, banks and insurance companies.

Citizen Protection

In a delicate balance between expanding the tax base while shielding the common citizen, the government introduced various measures aimed at improving their welfare. One method of tax collection is the Pay As You Earn programme. Taxable income brackets under this method – which had remained unchanged since 2005 – were expanded by a factor of 10% effective January 1, 2017. Personal relief granted to resident individuals was also increased by 10%. These measures are meant to increase the disposable income available among the citizenry.

In the same light, employment income paid in the form of bonuses, overtime and retirement benefits to employees whose taxable employment income before bonus and overtime allowances does not exceed the lowest tax band are exempt from income tax. This measure is targeted at low-income earners who bear the greatest burden in times of economic hardship.

Mortgage Relief

Home ownership remains a key aspiration for many individuals. However, this has remained a difficult task due to the high cost of properties in the country. Individuals who incur interest in a tax year on money borrowed from specified financial institutions to purchase or improve premises occupied for residential purposes in that year are entitled to a relief known as owner-occupied mortgage relief. This was increased from KSh150,000 ($1460) to KSh300,000 ($2930) per income year. This relief measure is likely to yield higher tax revenue while at the same time assisting those who wish to own their own home in Kenya.