A Commentary on the Kenyan Finance Act 2017

By Gatuyu T.J


In common law jurisdictions, Finance Act (the Act) is one of the most important revenue legislation enacted in a financial year. In Kenya, the Act was assented to on 21st June 2017.

CS Rotich
CS Rotich presenting the 2017 Budget Statement. Photo Courtesy

It has introduced a raft of changes on regimes of excise duty, valued added tax, income tax, and other policy measures impacting on the financial services.

However, the biggest introduction is the streamlining the taxation of Islamic finance arrangements. In this commentary, we shall highlight the key changes introduced.


Before, KRA was required to adjust specific rates of excise duties annually. However, manufacturing companies complained requirement for annual adjustment was onerous and hindered efficient planning. The Act has changed this and now inflation adjustments will be done only in “every two years”

Excise duty paid on spirits or illuminating kerosene used by a licensed manufacturer to manufacture unexcisable goods is refundable. Earlier, excise duty was only refundable on spirits. Illuminating kerosene is an inclusion.

In the interpretation of excise duty and excisable goods, what constitutes “powdered beer” has been defined to mean any powder, crystals or any other dry substance which, after being mixed with water or any other nonalcoholic beverage, ferments to, or otherwise becomes an alcoholic beverage.

Excisable goods imported or purchased locally by the St John Ambulance are now exempt from excise duty. St John joins Kenya Red Cross, another entity which is exempt from excise duty.


The VAT regime now recognizes Islamic finance arrangement and their VAT treatment. Islamic finance return will be treated as interest, when received or paid on a financial arrangement.

Importantly, the issue, transfer receipt or any dealing with “Sukuk”, is now an exempt service just like the case with bonds, shares and other securities. Any services which is treated as an exempt supply that are structured in conformity with Islamic finance are also exempt from the VAT.

In addition, asset transfers and other transactions related to the transfer of assets into Real Estates Investment Trusts and Asset Backed Securities.

Exempt supplies: An array of items have now been included in the first schedule to the VAT Act constituting goods which are treated as exempt supplies for VAT purpose. These are:

  • Aircraft spare parts imported by aircraft operators or persons engaged in the business of aircraft maintenance upon recommendation by the Civil Aviation Authority
  • Inputs for the manufacture of pesticides upon recommendation by the Cabinet Secretary
  • Specially designed locally assembled motor vehicles for transportation of tourists, purchased before clearance through Customs by tour operators. The vehicles must meet the certain outlined conditions
  • Transportation of cargo to destinations outside Kenya i.e. good in transit
  • Materials for the construction of grain storage, upon recommendation by the Cabinet Secretary for the time being responsible for agriculture.

Zero Rated Supplies: Various supplies have been included in the list of zero rated supplies. The advantage of zero rating, as opposed to having supplies as exempt, is that it enables claiming of the input VAT. Some of the items included are supply of maize (corn) flour, ordinary bread and cassava flour, wheat or meslin flour and maize flour containing cassava flour by more than ten per-cent in weight, agricultural pest control products, among others.


The Act introduces into the Income Tax Act various key definitions crucial to the implementation of the Islamic finance regime. These are “Islamic finance arrangement” defined to mean all financial arrangements, including transactions, instruments, products or related activities that are structured in accordance with Islamic law.

The other definition is the “Islamic finance return” defined to mean any amount received or paid in relation to Sukuk or an Islamic finance arrangement.

Expenditure incurred on donations to the Kenya Red Cross, county governments or any other institution responsible for the management of national disasters to alleviate the effects of a national disaster declared by the President is now tax-deductible under Section 15 of the Income Tax Act.

In a move to enhance transfer pricing regime, where a resident entity carries deals with entities operating in preferential tax regimes, to wit entities in Export Processing Zones, Special Economic Zones, they are expected to deal with them at arm’s length, and any benefit derived being not at arm’s length will be subject to tax.

Dividends paid by Special Economic Zone Enterprise, developers or operators to any nonresident person are now exempt from tax.

An investment deduction can now be claimed on:

  • Construction of transportation and storage facilities for petroleum products by the Kenya Pipeline Company Limited
  • Capital expenditure on buildings and machinery for use in a Special Economic Zone, where capital expenditure is incurred on the construction of a building

The rate of SEZ enterprise developer or operator is 10 per cent for the first ten years from the date of inception and thereafter 15% for another ten years “whether the enterprise sells its products to markets within or outside Kenya.” This means the entities in the preferential tax regimes can now sell their goods within Kenya and enjoy preferential tax rates.

In the case of company whose business is local assembling of motor vehicles, the corporate tax rates is fifteen per cent for the first five years from the year of commencement of its operations. However, the rate of fifteen per cent shall be extended for a further period of five years if the company achieves a local content equivalent to fifty per cent of the exfactory value of the motor vehicles.

The non-resident tax rates shall be in respect of management or professional or training fees, consultancy, agency, or contractual fee, be twenty per cent of the gross sum payable but with the rate applicable to any payments made by Special Economic Zone Enterprise nonresident persons shall be 5% of the gross amount payable and the rate applicable to the citizen of the East African Community Partner States in respect of consultancy fee shall be fifteen per cent of the gross sum payable.

The revenue from betting, gaming and lotteries shall be taxed at the rate of 35% and amount collected shall be paid into the Consolidated Fund.


In administering tax laws, KRA officers now have the power to enter and search any premises or vessels and seize, collect and detain evidence and produce such evidence in any proceedings before a court of law or tax appeals tribunal.

This provision may make proceedings before the tribunal to be unfair. Generally, it is the tax payer who institutes the proceedings after appealable decision, and KRA if cornered, may decide to invade premises of tax payers as way of intimidating or evidence hunting.

Clarifications have been provided on tax representatives. The registration of the tax representative shall be in the name of the non-resident person being represented. Further, a person may be a tax representative for more than one non-resident person, in which case the person shall have a separate registration for each non-resident person and the Commissioner shall issue a PIN to the tax representative.

The tax amnesty period has been moved from “31st December, 2017” to “30th June 2018.” There is however a requirement that the voluntarily declared funds have been transferred back to Kenya.

However, the amnesty does not apply in respect of any tax where the person who should have paid tax has been assessed in respect of the tax or any matter relating to the tax; or is under audit or investigation in respect of the undisclosed income or any matter relating to the undisclosed income.

In cases where no funds have been transferred within the period of the amnesty, there shall be a five-year period for remittance but a penalty of 10% shall be levied on the remittance.


The Stamp Duty Act now defines “Islamic property finance” to mean property or land leased or sold to a financial institution and then leased or resold to a person for a return in accordance with Islamic law.

The term “Sukuk” is defined in the Public Finance Management Act to means “certificates of equal value, representing undivided shares in ownership of tangible or intangible assets, usufruct of assets; services or an investment activity, structured in conformity with Islamic law.”

The Cabinet Secretary has been given authority to make regulations for raising money by issuing a Sukuk bond which shall specify the purpose for which money may be raised.

In any mortgage under which a financial institution provides an Islamic finance arrangement that enables a person to own property or land; and where the title or interest in the property or land is first transferred to the financial institution from the vendor and afterwards to that person, the duty shall be charged on the transfer of the title or interest to the financial institution by the vendor but shall not be charged on the transfer of the title or interest from the financial institution to that person.

In a Sukuk arrangement, transfer of title exempt from stamp duty where arrangement requires the transfer of title in an asset if at the beginning of the arrangement, the title shall be transferred from the original owner of the asset to the entity representing the interests of the Sukuk holders and during or at the end of the arrangement, the title shall be transferred back to the original owner of the asset from the entity representing the interests of the Sukuk holders.

However, sukuk arrangement shall not be exempt from stamp duty if the title to the asset is transferred during or after the Sukuk arrangement to any party other than the original owner; the arrangement is not effected for genuine commercial reasons; or the arrangement forms part of arrangements whose main purpose is the evasion of a tax liability under any tax law.

Nevertheless, “Sukuk” security instrument forms a general exemption from stamp duty just as the “Government security”.

The Cabinet Secretary for the National Treasury has now been empowered to under exceptional circumstances, extend the term of receivership, for a further period not exceeding twelve months. This is a welcome provision as it prevents having holding an institution in receivership in perpetuity.

Saccos Regulatory Authority has been given powers to make regulations providing for the licensing and supervision of co-operative societies carrying out deposit taking business in compliance with Islamic law.

7. Specially Permitted Procurement

A procurement method called specially permitted procurement has been introduced. A procuring entity may only use this method with approval from the National Treasury where:

  • Exceptional requirements make it impossible, impracticable or uneconomical to comply with the Procurement Act and the Regulations;
  • the market conditions or behavior do not allow the effective application of the Act and Regulations made under the Act;
  • for specialized or particular requirements which are regulated or governed by harmonized international standards or practices;
  • strategic partnership sourcing is applied;
  • credit financing procurement is applied; or
  • in such other circumstances as may be prescribed.

The author is a lawyer

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