Key Provisions of the Income Tax Act CAP 470
The Income Tax Act CAP 470 governs taxation in Kenya. Key provisions include:
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Tax Residency: Individuals are considered residents if they reside in Kenya for at least 183 days in a year or 90 days in a year and have been in Kenya for a total of 180 days in the previous four years.
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Taxable Income: All income earned by residents is subject to taxation, including salaries, business income, rental income, and investment income. Non-residents are taxed only on income sourced in Kenya.
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Tax Rates: The personal income tax rates are progressive, ranging from 10% to 30%. The prevailing PAYE rates must be applied according to the latest tax bands.
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Deductions: Taxpayers can deduct certain expenses from their taxable income, such as contributions to registered pension schemes, insurance premiums, and allowable business expenses.
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Corporation Tax: Resident companies are taxed at a rate of 30% on their profits, while non-resident companies are taxed at 37.5% on income derived from Kenya.
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Withholding Tax: Certain payments, such as dividends, interest, and royalties, are subject to withholding tax at specified rates, which must be deducted at source.
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Filing Requirements: Individuals and companies must file annual tax returns by the stipulated deadlines, usually by 30th June for individuals and 30th April for companies, and pay any tax due.
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Penalties: Failure to comply with tax obligations may result in penalties, including fines and interest on unpaid taxes, as stipulated in the Act.
Key points to remember
- Tax residency defined by days spent in Kenya.
- All income for residents is taxable; non-residents taxed on Kenyan income.
- Progressive personal income tax rates from 10% to 30%.
- Corporation tax rates: 30% for residents, 37.5% for non-residents.
- Filing tax returns by June 30 for individuals, April 30 for companies.
Worked example
Example Calculation of Taxable Income
Assume: A resident individual earns the following for the year:
- Salary: KES 1,200,000
- Rental Income: KES 300,000
- Business Income: KES 500,000
Total Income Calculation:
| Income Source | Amount (KES) | |-------------------|---------------| | Salary | 1,200,000 | | Rental Income | 300,000 | | Business Income | 500,000 | | Total Income | 2,000,000 |
Deductions (assume KES 200,000 allowable expenses):
| Deductions | Amount (KES) | |-------------------|---------------| | Allowable Expenses | 200,000 | | Net Taxable Income | 1,800,000 |
Tax Calculation:
- First KES 288,000 taxed at 10% = KES 28,800
- Next KES 192,000 taxed at 15% = KES 28,800
- Next KES 1,320,000 taxed at 20% = KES 264,000
Total Tax Payable:
- KES 28,800 + KES 28,800 + KES 264,000 = KES 321,600