The-Accountant-Jul-Aug-2017

Public Policy
OVERHAULING THE
INCOME TAX ACT AMID
CONFLICTING DEMANDS
By Timothy Mukiti, tmukiti@kpmg.co.ke
The National Treasury recently
invited the public to share
their views on the proposed
overhaul of the Income Tax
Act, Cap 470 of the Laws of
Kenya (ITA). The invitation comes as the
government embarks on the last leg of the
overhaul of the domestic tax legislation
which has already seen the enactment of
new Value Added Tax, Excise Duty, Tax
Procedures, and the Tax Appeals Tribunal
Acts.
The ITA was first codified in 1974 and
has undergone numerous amendments in
the intervening years. This has resulted in
a considerably convoluted document with
a number of contradictory provisions that
make it difficult to apply.
A classic example is the amendment
of Section 15(4) of the ITA by the Tax
Procedures Act, 2015 to the effect that tax
losses can be carried forward for up to nine
subsequent years. This amendment was
designed to extend the existing provisions
which restricted the carry forward to
four subsequent years. However, since it
takes effects from 1 January 2016 while
the previous restriction took effect from
1 January 2010, there is a gap on the
treatment of losses realised between 2010
and 2015.
The recent High Court decision in
the case of the Law Society of Kenya
v Kenya Revenue Authority further
exemplifies the ambiguities arising from
the piecemeal amendments to the Act;
causing the Act to be in conflict with
itself.
The Finance Act, 2015 amended the
Eight Schedule of the Act by introducing
paragraph 11A, which deemed the due
date for the payment of Capital Gains Tax
(CGT) for transfer of land and buildings
as the date “on or before” the date of
application for transfer of the property
at the Lands Office. The import of this
amendment was that CGT became due
before the actual transfer of ownership
since the a transfer is not complete until
it is registered with the land office as
provided for under section 43(3) of the
Land Act. The Kenya Revenue Authority
(KRA) quickly made changes to the
iTax platform to collect CGT before
completion of the transfer, causing an
unnecessary burden to taxpayers who
would be required to source for funds to
finance the CGT as they wait to receive
the disposal proceeds.
One of the key issues that have come
up in the debate over the overhaul of the
ITA is the impact of tax concessions and
whether they remain useful in attracting
foreign direct investments. This is an issue
that elicits strong emotions. Some parties
argue that the incentives are necessary
to make Kenya competitive while others
such as the International Monetary
Fund (IMF) and the Organisation
for Economic Co-operation and
Development (OECD) contend that the
incentives are prone to abuse and present
an avenue for tax leakages. Finding a
middle ground that satisfies the two
divides, will require solomonic wisdom.
The government continues to face
significant fiscal pressures with a 2017/18
budget of KES 2.6 Trillion against revenue
collections of KES 1.7 Trillion. Income
taxes contribute approximately 45% of
total revenues and the government is
likely to take advantage of the overhaul to
enhance this contribution. It will however
be a lost opportunity if the changes
only target existing taxpayers without
expanding the tax base and taking steps
through fiscal measures to address the
growing inequality.
Adopting global best practise will
require that the final legislation is simple,
in-tune with peculiarities of different
industries. The new legislation should
take cognisance of changing business
practices and address the challenges of
e-commerce and transfer pricing, among
others ,which threaten to ravage the tax
base.
JULY - AUGUST 2017 29