Installment Tax Reforms: Govt Eyes Penalty Reduction in Finance Bill 2024

The government is considering significant changes to the penalty structure for underpaid installment taxes.

The proposal, outlined in the Finance Bill 2024, suggests slashing fines by half, potentially providing much-needed relief to individuals and businesses grappling with tax liabilities.

Installment tax, a crucial component of Kenya’s tax system, involves the periodic payment of estimated income tax to the Kenya Revenue Authority (KRA). These payments are made in anticipation of the tax due for a particular year of income, allowing taxpayers to fulfil their obligations gradually rather than in a lump sum at year-end.

Under the current framework, taxpayers who underpay installment tax face a penalty of 20 per cent. However, the proposed amendment seeks to repeal this penalty provision, aligning it with penalties outlined in the Tax Procedures Act.

If approved, the underpaid installment tax would incur a reduced penalty of 5 per cent and monthly interest of one percent one per cent.

The Bill’s proposed changes reflect a broader effort to streamline tax regulations and enhance the country’s fiscal environment. By revising penalty structures, authorities hope to encourage voluntary compliance while minimising the adverse impact of penalties on taxpayers.

Section 83 of the Finance Bill delineates various penalty provisions based on the type of tax return and the nature of the taxpayer. For instance, late submission penalties range from 25 per cent of the tax due to a fixed amount of Ksh10,000, depending on the category of income.

The proposed revisions point to the government’s commitment to fostering a more taxpayer-friendly environment. By reducing penalties for underpaid installment tax, policymakers aim to foster greater transparency and cooperation between taxpayers and tax authorities.

The proposed amendments will undergo thorough scrutiny and debate before potentially being enshrined into law.

Lawmakers are expected to weigh the merits of the changes carefully, considering both the immediate impact on taxpayers and the broader implications for revenue collection and fiscal policy.

If approved, the revised penalty structure for underpaid installment tax could take effect in the upcoming fiscal year, offering taxpayers a reprieve from hefty fines and penalties.

However, the ultimate decision rests with legislators, who must balance the need for tax compliance with the imperative of supporting economic growth and financial stability.