Removal of KRA income tax waiver: Implications for an employer

For the last 42 years, the Kenya Revenue Authority (KRA) has waived the requirement for banks and large companies to pay separate income taxes. This waiver allowed these entities to combine their various sources of income for the purpose of tax computation. Banks, finance institutions, insurance, oil, and large manufacturing companies, as well as companies listed on the Nairobi Stock Exchange have enjoyed the right to waive section 15(7) of the Income Tax Act, 1975 which provides that: “the gains or profits of a person derived from rental income, capital gains, pension, agriculture, employment and investment income sources shall be computed separately from the gains or profits of that person derived from ... any other income of the person.

11 Oct 2021 1 min read Employment Law Alert Article

At a glance

  • For 42 years, banks, large companies, and listed entities in Kenya enjoyed a waiver from paying separate income taxes, allowing them to combine various sources of income for tax computation.
  • The Kenya Revenue Authority (KRA) has recently decided to withdraw this waiver, effective from 1 October 2021, requiring these entities to compute their income from different sources separately.
  • Employers in these entities should be prepared for increased overheads as a result of the change and need to comply with the new requirement.

This waiver has therefore enabled these entities to earn separate income sources outside of their core business and encouraged them to diversify their portfolios, free from any additional tax implications. This in turn has facilitated asset growth and financial stability amidst turbulent market changes. However, the recent KRA decision has sought to withdraw this four-decade-old waiver with effect from 1 October 2021. The KRA stated that this decision was premised on section 64(1) of the Tax Procedures Act, 2015 which authorises the KRA to withdraw a public ruling in whole or in part, by way of a notice in at least two newspapers of nationwide circulation. This notice was published and circulated on 22 September 2021.

Employers in these entities are set to incur greater overheads from 1 October 2021, as each of their income sources from the above specified categories will be computed separately. Employers need to be aware of the incoming changes and prepare to comply accordingly.

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