5 drastic ways the Finance Act 2022 changes innovation in Kenya


The Kenyan government just just approved and signed into law the Finance Act 2022, which will result in a number of changes to the way tax payments are processed. Find out how it will effect the tech space in the country in every possible way.

The Finance Act 2022 was signed into law by President Uhuru Kenyatta of Kenya on June 21 of that same year. When legislation such as these are signed into effect, it provides specific information about how a government intends to produce money, as well as how much it intends to spend and borrow. It should come as no surprise that digital platforms are currently receiving the most attention.

Since the advent of internet giants such as Google and Facebook, governments throughout the world have had a difficult time understanding their business models and determining how to effectively collect tax revenues. However, these titans of technology are merely a small portion of the enormous web that is the digital economy.

The Kenyan Finance Act has been hailed as a significant victory for taxpayers in some circles due to the fact that it provides clarification on a number of essential elements and adds a number of incentives. On the other hand, the regulations have the potential to make the majority of digital goods and services, such as cellphones and the Internet, more expensive.

The recently revised Finance Act is an expansion of earlier regulations that Kenya has previously implemented and enforced on digital platforms and services over the course of the past few years.

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You may recall that the Finance Bill 2019 included a tax of 1.5 percent on the total value of all transactions that are generated by digital platforms within the country. In addition, the marketplace regulations were launched, which included the imposition of a VAT of 14% on all transactions conducted via the internet.

In the year 2021, these technology businesses started implementing some of these restrictions, which marked a watershed point in the history of taxation in Africa. In its Finance Act 2020, Nigeria, like Kenya, also has provisions that are comparable to those that are currently being enforced in Kenya.

These laws prompted unfavorable responses, and Kenya's most recent modification has also received its share of complaints from many quarters. We'll restrict our attention on how it affects the innovation space in the country for the time being, but it's interesting to note that it also offers some crucial wins for taxpayers.

The emergence of large-scale technology

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The digital services tax might potentially be increased from 1.5 percent to 3 percent on the gross transaction value, according to recent reports that surfaced in the days leading up to the president's signature on the bill on June 21. Thankfully, the idea was withdrawn and significantly modified to exclude non-residents who have a permanent establishment in Kenya from the exemption.

Before the amendment, foreign technology businesses that had an establishment in Kenya were still required to pay the armpit of digital services tax. However, the new law will exempt these companies from having to pay the armpit of digital services tax. On the other hand, they will be liable to the standard taxes that are levied against resident businesses in the country.

This clause appears to be an olive branch extended to prospective IT corporations, and it is fascinating to note that its introduction has coincided with a significant increase in the number of international tech behemoths setting up shop in Nairobi, the nation's capital city.

The year 2022 saw the opening of one of Microsoft's two Africa Development Centers (ADC) in Nairobi, along with the company's announcement of plans to hire 450 new employees. In addition, Google declared that it would be establishing a product development center in Nairobi, a first for any country in Africa, and would be employing more than one hundred employees for the center.

Recent news includes the establishment of an innovation centre by global payments giant Visa and the announcement that Amazon aims to establish Amazon Web Services (AWS) in Kenya.

While these businesses might be required to pay digital taxes to the Kenyan government, they might also be able to build physical locations and negotiate additional tax breaks as they contribute increasingly more value to the local economy.

It's possible that other factors, such as a vast talent pool in the computer industry, had a role, but Kenya is not the most populous African nation with a developer workforce. South Africa is ranked first in the Africa Developer Ecosystem Report 2021 (pdf), while Kenya is in fourth position, after Egypt and Nigeria.

Finance Act 2022 Developers

Kenya has traditionally maintained a welcoming attitude toward luring international investment, and the elimination of this insignificant provision in the Finance Act might prove to be an advantage in this regard.

Additionally, it seems that other rules favor local investments.

Passenger automobiles crafted in the immediate area

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In addition to providing digital services, the superpower in East Africa is also making efforts to encourage local investments in the manufacturing sector. Through the provisions of the Finance Act 2022, the value-added tax (VAT) of 16 percent will be eliminated from all locally manufactured passenger vehicles as well as the inputs and raw materials utilized in the production process.

According to the Act, a passenger vehicle is considered to be locally made if it was produced in Kenya and if at least 30 percent of its total value is comprised of parts that were produced in Kenya by a local original equipment manufacturer ( OEM).

Kenya's automotive industry is primarily focused on assembly, sale and distribution of vehicles, much like the automotive industries in several other African nations. There is not a lot that is done on the local level to help businesses qualify for this VAT exemption.

In recent years, Kenya has made efforts to revitalize its domestic automobile manufacturing industry, but these efforts have not been without their share of obstacles. Following the completion of the first five prototypes of the Nyayo automobiles in 1986 at the University of Nairobi, we were required to wait until 2009 before the introduction of Mobius motors.

Mobius was founded with the intention of producing motor vehicles for the African market; however, the company has had a difficult time competing against the second-hand market due to the abundance of used automobiles in the country.

Used Vehicles vs New in Kenya - Finance Act 2022

The majority of Kenyans are unable to purchase brand new vehicles due to the country's low to middling income levels. Used cars account for 85 percent of all vehicle purchases and are imported into the country by dealers at a rate of 90 thousand every year.

Statista estimates that there will be 246,000 motorcycles and autocycles registered in Kenya in the year 2020. This number compares to 58,000 station wagons and 7,700 salon cars. It's possible that vehicle prices may be lowered and made more accessible if there was a law that encouraged more local manufacturing of vehicles.

Improvements in health care

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Because the provisions of the financing act eliminate practically all forms of taxation associated with the production of vaccines, pharmacies and innovative health firms may also benefit from its provisions. To put this into perspective, you would not be responsible for paying income tax, withholding tax, VAT, RDL, or IDF. You can indulge your inner nerd by selecting any of the sites provided.

In addition to the manufacturing of vaccines, the Act eliminates excise duties on plants and machinery imported into the nation for the purpose of producing pharmaceutical products. This change is made on the proposal of the Cabinet Secretary. You'll find that Kenya's focus with this strategy is on incentivizing local manufacture, much like it does with the manufacturing of vehicles.

Finance Act 2022

As a result of the establishment of COVID-19, a number of health institutions have been placed under significant pressure, and these policies want to encourage the development of novel approaches to local health care. As of the 19th of June in the year 2022, only 18.5 million Kenyans had been immunized, which is only 34 percent of the country's total population.

There is no shortage of firms in Kenya that are doing amazing things with technology to find solutions to health challenges. You'd see businesses like Tibu Health, Ilara Health, and Tambua Health utilizing creative innovations and business strategies to take on the challenge of creation in Africa.

Although there are parts of the measure that seem to hold promise, there are also parts of the bill that raise some concerns.

It's possible that using the internet will get more expensive.

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One of the less favorable parts of the Finance Act 2022, which has now been signed into law, is the introduction of excise duties on various different commodities. These costs will be imposed on SIM cards and smartphones, both of which are necessary components for gaining access to the internet. These devices are included together with other luxury items like as jewelry, chocolate bars, and cosmetic products, all of which are subject to an excise charge of 15%.

The government has decided to begin charging a fee of ksh50 (about 42 cents) for every SIM card that is carried into the nation and an excise duty of 10% on every smartphone that is brought into the country. In addition to the excise duties of 20% that are already levied on phone calls and Internet data in the country, these levies will now be implemented.

Finance Act 2022

The Communications Authority of Kenya reported in 2021 that there were 59 million mobile subscribers, with 33 million connections coming from feature phones and 26 million connections coming from smartphones.

As a result of global shortages, the average selling price of cellphones in Kenya jumped by 25.1% in the second quarter of 2022; therefore, you can anticipate what will happen when retailers include in the increased import levies.

Despite the fact that 87 percent of Kenyans have Internet access, just about half of them own smartphones. Although organizations such as GSMA have proposed a number of methods to increase smartphone penetration, the excise levies that will be placed on smartphones will not likely inspire more people to adopt smartphones.

The movement of money and lending

SAFAricomPhoto Credit: hktang Flickr via Compfight cc

The decision to impose an excise duty of 12 percent on money transfers and a 20 percent tax on the fees levied by mobile digital lenders is somewhat perplexing.

As a result of the growth in mobile money spearheaded by Mpesa in Kenya, the country has a commendable record for financial inclusion in comparison to other African nations. Mobile money makes it easier for consumers and businesses to conduct transactions with one another, and Mpesa has left traditional banking institutions in its wake.

If the government were to enforce transfer taxes, it might drive numerous people who are proficient with technology to switch to cryptocurrencies.

According to a survey by Luno, the nation has maintained its position at the top spot for global P2P trade volumes for the past two years in a row. Insignificant in comparison to the regulation that plagued Nigeria.

Reflections on the Taxes and Finance Act of 2022

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The Kenyan government has, over the course of the previous three years, begun the practice of annually revising important provisions of the country's fiscal code. This consistent change could indicate an intention to keep up with the trends, but it might also create confusion among investors. After a year, what will happen to all of these different incentives?

If you are developing unique products in East Africa, now would probably be a good time to take a close look at Kenya and Rwanda. After that, you may contact me at emmanuel@techpoint.africa to discuss more opportunities.