Income Tax

Income Tax is a direct tax that is imposed on income derived from

Business, Employment, Rent, Dividends, Interests, and Pensions
among others. Every taxpayer with income chargeable to income
tax is required to have a Personal Identification Number (PIN).

There are various methods of collecting income tax, which

include:
a) Pay As You Earn (PAYE)
PAYE is a method of collecting income tax at source from
individuals in gainful employment. The employer deducts a
certain amount of tax from the employee's salary or wages on
each payday and then remits the tax to the Authority. This
method of deducting income tax from salaries and wages applies
to all income from any office or employment. It applies to weekly
wages, monthly salaries, annual salaries, bonuses, commissions,
directors' fees, pension payments that exceed Kshs. 180,000 per
annum, and any other income from an office or employment. The
system applies to all cash emoluments and all credits granted by
employers to their employees, no matter to what period they
relate. It however does not include earnings from "casual
employment" for a period of less than one month, but includes
regular part-time employees and regular casual employment.
b) Corporate Tax
Corporate tax is a form of income tax that is levied on the income
of corporate bodies such as limited companies, trusts, and co-
operatives. Local companies are taxable at a rate of 30% while
foreign companies are taxable at a rate of 37.5%. For export
processing zones, the first 10 years are tax-free, but the tax rate
is 25 percent for the next 25 years. Income of registered unit
trusts or collective investment schemes is exempt subject to
specific conditions.
c) Withholding Tax
Withholding taxes are deducted at source from the following
sources of income: Interest, dividends, royalties, management or
professional fees, commissions, pension or retirement annuity,
rent, appearance or performance fees for entertaining, sporting or
diverting an audience.
d) Installment Tax
This tax is paid by both individuals and corporate taxpayers with
tax payable for the year unless the tax liability is fully covered by
PAYE or the final tax liability is below KShs. 40,000. The tax
installments are distributed evenly in quarterly installments (25
percent). The tax is payable before the 20th day of the 4th, 6th,
9th and 12th month of the year of income for all taxpayers except
for agricultural sector taxpayers. The agricultural sector taxpayers
pay in two installments – 75 percent in the 9th month and 25
percent in the 12th month.
e) Advance Tax
Advance tax is applicable to all public service and commercial
vehicles. It is not a final tax, but a tax partly paid in advance
before a public service vehicle or a commercial vehicle is
registered or licensed. It is mainly aimed at ensuring compliance.
f) Turnover Tax
This is an indirect tax that is applicable to small business
taxpayers whose total amount of revenue/sales (turnover) is
below KShs. 5 million. Thus, small business taxpayers who do not
qualify for VAT pay the turnover tax. The Turnover tax is aimed at
bringing businesses in the informal sector into the tax bracket.
These include small scale manufacturing firms and Jua Kali
businesses, agricultural enterprises and transport industries. The
turnover tax rate is 3 percent. Businesses that make losses are
exempt from turnover tax. However, it should be noted that
turnover tax does not apply to rental income, management or
professional fees or training fees, income subject to withholding
tax as a final tax and income of incorporated companies.

g) Presumptive Income Tax

Presumptive income tax is a withholding tax on agricultural
produce. This tax was suspended in 2001.

h) Capital Gains Tax

A capital gains tax is a tax that is charged on the profit realized
from the sale of an asset that was purchased at a lower price. The
most common capital gains are realized from the sale of stocks,
bonds, precious metals and property. In Kenya, Capital gains tax
was suspended in 1985 but it was re-introduced in 2006/07
covering only properties (excluding motor vehicles and
marketable securities), thus excludes the stock market. Property
owners are charged a 10% tax on the gain arising from the sale of
property and buyers are charged 3% of property value. This move
impacts on the allocation of resources, mainly from the taxable
properties to the non-taxable properties. For instance, a taxpayer
would choose to invest in the stock market as compared to the
real estate sector, given that profits realized from the stock
market are not taxable.