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"id": 246663,
"url": "https://info.mzalendo.com/api/v0.1/hansard/entries/246663/?format=api",
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"type": "speech",
"speaker_name": "Mr. Kimunya",
"speaker_title": "The Minister for Finance",
"speaker": {
"id": 174,
"legal_name": "Amos Muhinga Kimunya",
"slug": "amos-kimunya"
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"content": "Thirdly, Mr. Speaker, Sir, to simplify and enhance compliance with taxation of wine products, I propose to increase the excise tax on wines from 45 per cent to a hybrid rate of Kshs54 per litre or 65 per cent, whichever is higher. This measure will harmonize all wine products including fortified wines. Similarly, to improve compliance with excise tax laws under the spirit industry and to ensure equity in our tax system, I propose to increase the tax on portable spirits from the current rate of Kshs100 per proof litre or 65 per cent to Kshs120 per proof litre or 65 per cent, whichever is higher. This measure is expected to create a level playing ground for the alcoholic beverage industry. Mr. Speaker, Sir, to improve compliance with tax laws and drawing from the successful experience in the cigarette industry, I propose to introduce excise stamps on wine and spirits whether locally produced or imported. In order to address inequity among cigarette smokers and to raise more resources, I propose to increase the excise tax on category \"B\" and \"D\" by 10 per cent to Kshs780 per mille and Kshs1,690 per mille respectively. These excise measures are effective from midnight, today. Mr. Speaker, Sir, on measures to encourage growth of the financial sector, a strong, vibrant and efficient financial sector is essential for economic development and needs to be encouraged. 1420 PARLIAMENTARY DEBATES June 15, 2006 First, in the insurance sector, the income received by Policy Holder's Compensation Fund is not exempted from Income Tax. I propose to exempt the Fund from paying Income Tax in line with Investor Compensation Fund and the Deposit Protection Fund, which have similar objectives. Secondly, the current unlimited level of compensation for Third Party body injuries claims by the insurance companies has made insuring motor vehicles not only costly to motorists, but it has also made business unviable to insurers. To encourage the growth of this sector and to create employment opportunities for our young persons, I propose to limit up to Kshs3 million, any compensation payable by the insurance companies on the third party injury claims arising out of any one claim by any one person. I consider this as a stop-gap measure, while we await for the enactment of a Structured Accident Compensation Bill or a long-term solution to the existing problem. Thirdly, as a I have pointed above, the motor vehicle insurers have been experiencing a lot of difficulties, some emanating from insurance brokers holding premiums collected on their behalf for 60 days, and in some cases, for more, and in some cases, not even limiting it, while the insurer assumes the risk immediately the premium is paid to the broker, or the cover is issued. To address this and reduce the cost to the insurance industry, I propose, under the Insurance Act, to provide that in respect of motor vehicles and fire insurance business, the broker should remit the premium the same day he or she receives it. This \"cash and carry\" measure will improve the liquidity of the insurer as well as minimize the risks of the money not being remitted to the brokers, thereby exposing the insured. Fourth, the current insurance law restricts insurance agents to act for a maximum of three insurers. This also reduces the choice to the insurers as to who they can appoint as their agents. To circumvent this, it has prompted the agents to use different names in order to look for more businesses in the insurance industry. To encourage our talented young school and college leavers to find jobs in the insurance industry, I propose to amend the Insurance Act to remove this restriction. This will enable the agents to act for as many insurers as can appoint them, consistent with a liberalized economy. Finally, as I mentioned earlier, there is need to broaden the financial sector to allow for more differentiated banking products and services. I am, therefore, proposing to amend Section 53(1) of the Banking Act to allow for the introduction of new banking products, subject to approval by the Minister. These will include products such as Islamic banking, mortgages and asset leasing which are currently not covered by the law. On measures to improving Tax Administration and Reducing Compliance Costs and to further simplify Value Added Tax (VAT) under the hotels and restaurants, I am proposing to harmonise the VAT rate applicable on all taxable services provided by hotels and restaurant owners at a general rate of 16 per cent. Secondly, the current tax payers are allowed to recover the cost of their Electronic Tax Registers (ETRs) from the tax payable, but there is no time limit on this. I propose to provide for tax payers to recover the cost of the ETRs from the tax payable by 31st December, 2006. Tax payers who will purchase and instal ETRs after 31st December, 2006, will not be allowed to recover the cost of the ETRs from the VAT payable, but may recover that through investment reduction. They will have to pay out of their own resources. Thirdly, I mentioned about the fraudulent claims being raised which are delaying the whole issue of assessment of VAT claims for payment. To penalise the tax payers who lodge refund claims that are not genuine, I propose that any registered person who submits a fraudulent refund claim will be liable to a penalty equivalent to twice the fraudulent claim lodged. Such a person will also be prosecuted and imprisoned for a term not exceeding three years or both. This penalty for fraudulent claims applies to all taxes; VAT, Income Tax and any applicable tax. June 15, 2006 PARLIAMENTARY DEBATES 1421 Fourth, the non-resident withholding tax rate of service providers in telecommunication sectors has been left to the discretion of the tax authority. To remove this uncertainty, I propose to impose a withholding tax at the rate of 5 per cent on the gross receipts by a non-resident service provider whose income accrues or is derived from Kenya. Fifth, during the last Budget, the employee's contribution to the Retirements Scheme was locked in until the employee's retirement age. This has created some difficulties to some people, especially those who are leaving the country permanently. In view of this, I propose to allow those individuals leaving Kenya permanently to access all their benefits. Sixth, business deals between foreign entities and related resident persons within a multinational group should be carried out as if there were two independent entities. Determination of \"arms length\" price has not been clear in the law. In order to bring certainty in the determination of \"arms length\" price, I propose to publish the Income Tax (Transfer pricing) Rules, together with the Finance Bill. Seventh, since the introduction of Income Tax leasing rules in 2002, asset financing of equipment and machinery through leasing has increased. The potential for lease financing of saloon motor vehicles is high in Kenya. I, therefore, propose to remove the current restriction that limits tax advantage to asset financing for commercial vehicles. However, in order to safeguard revenue, I further propose that lease rentals will be subject to withholding tax at the rate of 15 per cent of gross sum payable. Lastly, on this category, up to 75 per cent of the registered VAT payers file nil returns or do not file any returns at all annually, while the 40,000 VAT registrants who have a turnover of below Kshs5 million pay a total of less than Kshs300 million annually. We appreciate both the considerable costs borne by those taxpayers in complying with VAT regulations and the disproportionate costs incurred by the KRA in trying to enforce compliance. To reduce the burden to taxpayers, improve compliance and ensure taxation of small taxpayers conforms to best international practices, I propose to introduce a turnover tax, effective 1st January, 2007, under the Income Tax Act at a rate of Kshs150,000 per annum or 3 per cent of the declared turnover, to cater for this category of taxpayers which shall be a final tax. Consequently, the VAT threshold will be raised to Kshs5 million per annum. This means that any business not earning Kshs5 million per annum need not register for VAT. Mr. Speaker, Sir, on measures to improve on governance, first, the current law provides that the Governor and Deputy Governor to be the Chairman and Deputy Chairman of the board of directors of the Central Bank of Kenya (CBK), respectively. This arrangement leads to conflict of interest. To enhance corporate governance in the management of the CBK, I propose to amend the CBK Act to provide for the Chairman to be an independent person. In this regard, the Governor will become the Chief Executive of the Bank and will be responsible for carrying out functions imposed on him by the CBK Act. The Governor will then be answerable to the Board of Directors. Secondly, for a long time the Sugar Development Levy has been levied erroneously as a sugar tax on the consumers, contrary to the understanding of user charge. As a user charge, the Sugar Development Levy should correctly be levied on those who use or directly benefit from the Fund. In order to correct this situation, and to improve governance by ensuring that those who contribute this levy hold the Kenya Sugar Board accountable, I am proposing to amend the Sugar Levy Order to shift the base from the final consumer to the cane growers where it should have been in the first place. This measure will reduce the price of sugar to our consumers, while making sugar farmers vigilant on the utilisation of this Fund. This order will take effect from 1st January, 2007 to allow for the necessary adjustments and consultations with all those affected. Mr. Speaker, Sir, lastly, a number of companies hold huge amounts of unclaimed dividends attributed to various reasons, including change of addresses of the beneficiaries, and closure of 1422 PARLIAMENTARY DEBATES June 15, 2006 bank accounts, among others. To ensure that beneficiaries do not lose their benefits according to the Limitation of Actions Act after seven years, I propose to amend the Capital Markets Act to approve that dividends that remain unclaimed for more than seven years be paid to the Capital Markets Investor Compensation Fund where the beneficiary will be able to access or claim if he or she resurfaces. In conclusion, as I noted earlier, the 2006/2007 Budget I have just presented contains the main framework for building a prosperous future for our country. This framework includes; (i) The shifting of resources to key priority areas such as infrastructure, agriculture, health, education, youth and undeveloped or marginalised groups; (ii) The deepening of the structural and governance reforms to reduce administrative and legal barriers to create a favourable environment for private sector investments. (iii) Reducing the poverty and addressing income and regional inequalities through targeted intervention, including through increased spending in rural development and reducing taxes which fall disproportionately on the poor. (iv) Empowering all Kenyans, and in particular, our youth, through skilled development, and by creating economic opportunities and business environment both in the rural and urban areas. Mr. Speaker, Sir, the Budget proposals I have outlined this afternoon are intended to lock in the gains in development we have achieved over the last three years. But more importantly, these proposals are aimed at laying a firm foundation for accelerated growth as a means of wealth creation, poverty reduction and equitable social development. Mr. Speaker, Sir, achieving our shared development vision for a prosperous and democratic Kenya with equitable social development will not be easy. It will require our continued commitment to excellence, persistence, hard work and above all, a strong sense of patriotism. It will also require renewed faith in ourselves, and a passionate conviction that with God's help, we can achieve our best dreams. In my humble opinion, we only need to engage less in politics and more in production, with our eyes firmly fixed on the goal."
}