Category Archives: Kenya taxation

KPMG on the 2018 Finance Bill Amendments

The President of Kenya signed the Finance Bill 2018 after a stormy debate in Parliament last week that saw chaotic arguments about vote procedure methods used and actual vote counting mainly with regards to VAT on petrol products.

Some of the earlier clauses in the Finance Bill had been highlighted and KPMG, which has done a series of articles,  has provided a further update on aspects of the laws in Kenya and which they termed “..the changes present an unprecedented disruption of the tax regime that will impact the economy and citizenry for years to come.

Their perspective on the signed Finance Bill implications:

  • Excise duty on services: The President accepted Parliament’s decision to drop a Robin Hood tax of 0.05% on money transfers above Kshs 500,000 (~$5,000). But the shortfall was replaced by an increase in taxes on all telephone and internet data services, fees on mobile money transfers, and all other fees charged by financial institutions which all now go up by 50% – and which KPMG writes may have a negative impact on financial inclusion.
  • A national housing development levy was approved. With the country’s wage bill of Kshs 1.6 trillion, KPMG estimates that government can potentially collect Kshs 48 billion a year (~$480 million) from the levy, (Kshs 24 billion of which will be from employers) – a massive amount when compared to the Kshs 12.8 billion that NSSF – the National Social Security Fund collects in a year. Regulations for the National Housing Development Levy Fund (NHDF) have not been set, other than that the payments are due by the 9th of the following month. For employees who qualify for affordable housing, they can use that to offset housing costs but for those who don’t qualify, they will get a portion of their contributions back after 15 years.
  • Petroleum VAT: KPMG says that a significant portion of the government’s tax targets for 2018/19 was dependent on value-added tax (VAT) on petroleum products and that is why they have been insistent on having this implemented. Sectors that supply exempt services such as passenger transport (PSV’) and agriculture producers are expected to raise their charges to customers as they are unable to claim back the 8% VAT tax.
  • Kerosene, which is used by low-cost households, takes a double hit with the introduction of VAT as well as an anti-adulteration tax of Kshs 18 per litre. Already kerosene now costs more than diesel in some towns around the country.

  • Excise duty on sugar confectionery, while opposed by sugar industry groups, was reinstated in a move similar to other countries that are trying to address lifestyle diseases by introducing taxes on sugar products.
  • The betting industry, whose survival which was at stake, gets a reprieve as the gaming and lotteries taxes, introduced on January 1, were reduced from 35% to 15%. Many of the prominent betting companies had scaled back their advertising and sponsorship and had turned to engage in serious lobbying efforts ever since. Also, an effective 20% tax on winnings has now been introduced. The earlier tax law allowed bettors to claim some deductions if they kept records, but that has been removed altogether.

Kenya Finance Bill 2018

In a year in which there were crucial changes proposed to Kenya’s tax system, the National Assembly passed the Finance Bill 2018, but the President refused to assent to it and sent it back to Parliament with his proposed amendments to fuel, banking, housing, gambling and other taxes.

Sectors affected by the memorandum.

  • Banking: For every transaction your bank charges you, currently there is a 10% levy which will now go up to 20%. Also, the fee on money transfer and mobile banking services will be 20% on excisable value – up from a proposed 12.5%.
  • Telecommunications: a tax on telephone and Internet services will be 20%, up from an earlier 15% tax on the excisable value
  •  Food: He proposed reinstating a sugar confectionery tax that parliament had dropped.
  • Fuel; Kerosene will cost the same as diesel after the introduction of an anti-adulteration tax. VAT which Parliament had pushed back by another two years, and which the President wrote would cause a Kshs 35 billion shortfall in this year’s budget. He, therefore, proposed an immediate reinstatement of VAT at 8%. (VAT in the country is levied at 16% for all other goods and services that qualify).
  • Housing: Employers shall pay a new housing development levy on behalf of employees – with the employer’s contribution at 1.5% of salary and the employees at 1.5% of salary – up to a maximum of Kshs 5,000 – to be remitted on the 9th of the following month to the proposed National Housing Development Fund.

Employees who don’t qualify for the low-cost housing proposed will still have their money go to the Housing Development Fund and will get it back when they retire,

  • Gambling: tax reduced from 35% to 15%.

The President also asked Parliament to reduce the national government budget by Kshs 55 billion. Parliament was on a month-long recess but has resumed this week for special sitting sessions relating to the Finance Bill 2018. They received the President’s memorandum on Tuesday 18th September, with the budget committee meeting on Wednesday to review and approve these changes for Parliament to vote on Thursday 20th September.

Kenya Banks – Super Profits Back?

The simultaneous release on Thursday morning of half-year results of Kenya’s three largest banks portrays a picture of the banks resuming their super profits streak even as the government looks set to repeal interest rate caps later this year.

But the results are deceptive in that the banks have all shown flat growth in loans, despite the growth in customers deposits which have increasingly been channelled towards funding government debt, at the expense of the private sector.

The results showed:

  • Flat growth in loans: e.g while KCB deposits are up by Kshs 40 billion this year, net loans are actually lower than December 2017. 
  • Decline in assets and capital – as the banks noted that the adjusted capital ratios were due to CBK guidance on IFRS9. 
  • NPA’s up.  
  • Growth in the diaspora and the East Africa region.
  • KCB is expected to complete  the acquisition of Imperial Bank later this year

James Mwangi CEO of Equity spoke of the bank’s total income now being ahead of where they were in June 2016 before the interest rate caps were set by Parliament, and that the June 2018  results were achieved despite losing 40% of loan interest income in Kenya. Interest rate caps which were reintroduced in Kenya in 2016 were pushed at a time when large banks were recording “super profits” and which parliamentarians attributed to them charging high-interest rates to borrowers.

Another factor has been cost efficiency improvements through digitization and a move away from fixed investments in brick and mortar. Equity also reported that 97% of customer transactions were done outside branches and these accounted for 55% of the value of transactions, and their CEO said that in future, branches will be for high-value transactions, advisory services, and cross-selling products.

With the result of the three, along with that of Barclays and Stanbic earlier this month, we have results of five of the seven largest banks in Kenya and none from the smaller banks. Last year,, the top -ten banks took over 90% of the industry profits. What does IFRS9 portend for the smaller banks?

EABL: Beer, Taxes, Innovations, Tanzania.

EABL released their financial results for their 2018 year to June this week. It was a tale of two halves with flat growth in the first half of the year which coincided with Kenya ’s prolonged electioneering period and which affected sales of its products such as Senator lager, an affordable beer brand.  But the second half of the year (January to June 2018) saw a more business-friendly environment and more money in consumers pockets.

EABL ended the year with 5% revenue growth to Kshs 73.5 billion and the star of the show for the company in 2017 was Tanzania which saw 41% growth, mainly driven by Serengeti Lite beer. Also, special innovations that contributed 22% to the results is one of the best performances in the world. At EABL, Tanzania’ grew to account for 11% of revenue while Kenya’s was 73%, and Uganda was at 16%.  Capital expenditure was Kshs 13 billion, up from the 5 billion the year before and Kshs 7.8 billion was due to the Kisumu plant which is expected to be opened later in 2018. While overall profit before tax for EABL was Kshs 11.7 billion, a decline of 12% from the year, the company will pay out the same Kshs 7.50 per share dividend to shareholders.

The EABL managers spoke of innovating to reach the 1 million consumers who attain the legal drinking age (18) every year in Kenya – and investment in existing brands, and rolling out new brands to win over changing customers tastes. They also made some excise tax savings in Uganda by moving some  Tusker and Guinness production there while in Kenya, EABL’s profit was weighed down by a Kshs 2 billion one-off provision for taxes that significantly reduced their final result. They said a stable tax environment would enable the company to generate more taxes for governments without causing consumers to pay more.  

Also that by doing more local production of beer and spirits at Ruaraka in Nairobi, at Tanzania, Uganda and soon at the new line at Kisumu has allowed them to bring global brands into countries and produce and offer them at local prices. In the 2019 financial year, they will commercialise the Kisumu brewery which will also benefit 15,000 farmers and generate over 100,000 direct and indirect jobs in the production and distribution chain of Senator beer from Kisumu.

Urban Inflation Index July 2018

The running urban inflation Index compares prices of common goods In Nairobi to what they cost one year ago, five years and ten years ago when the index started.
The  July 2018 index comes at a time when there are sensational headlines about quality and counterfeits that was triggered by the drought of 2017 and subsequent importation of foods including sugar late last year.

It has also tricked into crackdowns, indictments, arrests, and parallel investigations by the Police, tax authorities,  parliamentary committees and food safety regulators that has seen queries about tons of goods including sugar, fertilizer, animal feed, building materials, alcoholic spirits, (refilled) LPG gas, auto spares, and sports shoes among other common items – with confiscations at the Mombasa Port, airports like Eldoret and bazaars and shops in Nairobi which have resulted in some demonstrations by business traders.

On to the index.

More expensive

Staple Food: A 2 Kg pack of Unga is Kshs 98 today. Last year, it was at a government-subsidized price of Kshs 90. In 2013 it was 104, and ten years ago, an Unga pack was Kshs 73.

Beer/Entertainment: A bottle of Tusker beer is Kshs 230 at the local pub. Five years ago a beer was 200, and ten years ago a beer was Kshs 130. Just a few months ago, during a tour of Kenya Breweries, the managers said that, based on the recommended retail price of Kshs 140 for a bottle of Tusker, Kshs 84 was tax, Kshs 23 goes to the distribution chain and just Kshs 33 was for them as a company to produce the beer at profit and to pay its shareholders.

Domestic electricity pricing over ten years of the inflation index.

Electricity: A chart of domestic prepaid electricity purchases shows that electricity was at its lowest in May 2015, and its highest in July 2015 and now in July 2018. One observation is that pre-paid power purchases no longer fluctuate. At the beginning of the month, one used to get 40 or even 50 units for Kshs 500 ($5), but now that amount only realizes 22 units and the pre-paid meters issue a (low-token )beep warning the whole month – and power tokens seems to exhaust a lot faster (because the units are less initially)

Other Food Item: Mumias, which used to be part of the index, was Kenya’s sugar industry bellwether – a diversified company that also produced ethanol and electricity and whose shares were once offered to the new investors at Kshs 49 per share. but which now trades at less than a shilling (Kshs 0.70) today. But Mumias now has no stocks on supermarket shelves as production was halted due to a lack of cane and long pending bills owed to farmers. A  2 kg pack of Mara, a competing sugar brand, is Kshs 298. A year ago, a bag of Chemelil sugar was 290, and five years ago Mumias sugar was 250, while ten years ago, a Mumias pack cost Kshs 145.

About the same

Fuel: Earlier this month, the ERC raised the price of petrol by 3 shillings – so in Nairobi a litre of petrol now costs Kshs 112.2 (approximately $5 per gallon). Last year a litre of petrol was Kshs 97.1, five years ago it was Kshs 109.52, and ten years ago it was Kshs 101.50 per litre. But from September 1 2018, Value Added Tax (VAT) which is 16% is expected to be added back to the cost of fuel.

Finance: Bank loans are 14.%, and have remained so ever since the introduction of interest capping in 2016. But the law is set to be adjusted this year by the government, in spite of opposition from parliamentarians who had passed the cap law. Also, average bank rates were 17% in July 2013.

Communication: Not much has changed in terms of phone rates over the last few years. At Safaricom which had (March) 2018 revenue of Kshs 224 billion, 40% of that was from voice, 28% from payments (such as M-Pesa), and 16% from data while SMS accounted for 8% of revenue. The cost of making mobile payments went up slightly in this year’s budget with a tweak in the excise tax on money transfers, and a charge on large bank transfers that has since been temporarily suspended by a Court.

Foreign Exchange: 1 US $ equals Kshs 100,75, while a year ago it was Kshs. 103.9. Five years ago it was 87.15 and ten years ago the dollar exchanged at Kshs 67.4. Also ten years ago the Euro was at 101, the Rand 8.9 and the Sterling Pound 125, while today the Euro is at Kshs 117, the Rand at Kshs 7.4 and the Pound at Kshs 133.

Other Energy Source: An LPG gas cylinder at Kenol is Kshs 2,250 this month. A year ago (in March) it was 2,030 and six years ago (2012) it was 3,000.

Less Expensive

Nothing really

Share this inflation index if you agree with the perceptions about what has become more or less expensive over the years.

If it were all left up to you, how would you improve the urban inflation index?