Kenya Revenue Authority (KRA is always under pressure to collect revenue to reduce the budget deficit. An increase in revenue empowers the government to implement projects in line with its mandate of improving people’s lives. Despite this pressure, KRA gives tax incentives to investors to encourage investment activities. The amount of revenue collected by the tax authority is directly related to the growth of investment making it imperative to promote local and foreign direct investments through tax incentives. KRA tax incentives are broadly classified into investment deduction allowances and capital allowances.
Investment Deduction Allowances
This tax incentive is given to investors who incur costs that are of capital nature in manufacturing and some hotels. The incentive is offered once and is offset against the profit made during the first year of the asset’s use. In case the entire investment is not recouped during the first year, the residual amount is passed to wear and tear allowances and industrial and building allowances thus giving more tax incentives to the investor.
These tax incentives are broadly classified into wear and tear allowances and industrial and building allowances. It targets investors incurring capital costs on industrial building and machinery. Wear and tear allowances are incentives given on machines calculated on a reducing balance method. Qualifying machines are classified into four. The first class comprise of the heavy machinery such as tractors, combine harvesters, and earth moving equipment among other heavy machines. A rate of 37.5% is used for calculating the allowances for class one machines. Class two machines include other self-propelled vehicles and aircrafts, and a rate of 25% is used. The third class is made of other machines that do not fall under class one or two are in class three, and they include ships among other machines where a rate of 12.5% is used. The last class comprise office equipment such as printers and computers whose capital allowance is provided at a rate of 30%.
Industrial and building allowance is provided on a straight line basis, and it targets capital expenditure on buildings used in hotel and manufacturing activities. The rate for calculating the allowance for hotel and building is 4% while that of the industrial building is 2.5%.