Tax Incentives Available To Developers Of Affordable Housing.

The Affordable Housing Programme was launched in 2018 as part of the government’s big 4 agenda. Since its launch, the parliament has provided a multitude of tax breaks aimed at encouraging the development of affordable housing units. However, with the outbreak of the covid-19 pandemic and the corresponding flurry of amendments to the tax laws which followed, there is a need to look at the tax incentives which are available to entities developing affordable housing units.

• Value Added Tax Exemption on goods imported or developed locally for the direct and exclusive use in the construction of affordable units.

The VAT Act under the First schedule provides for VAT exemption of goods imported or purchased locally for the direct and exclusive use in the construction of affordable housing units. To benefit from this exemption, the affordable housing project must be approved by the Cabinet Secretary (CS) responsible for matters relating to housing. From our experience assisting clients, the application ought to be made well in advance to the State Department of Housing accompanied by critical documents such as the schedule of drawings of the project, the detailed bill of quantities and master list of the goods and equipment to be used. Upon approval by the State Department, the application is then forwarded to the CS responsible for Finance for approval and subsequent action by the Kenya Revenue Authority (KRA).

• Reduced rate of Import Declaration Fee on goods imported into the country under the affordable housing scheme.

Section 7 (2A) (c) of the Miscellaneous Fees and Levies Act 2016 provides for a reduced import declaration fee (IDF) of 1.5% on the custom value of goods imported under an affordable housing approved by the CS for Finance upon recommendation of the CS responsible for matters related to housing. The reduced  IDF of 1.5% on the custom value represents a significant tax saving as the normal IDF rate stands at 3.5% of the customs value of the goods.

• Reduced rate of Railway Development Levy on goods imported into the country under the affordable housing scheme

Section 8 (2A) (b) of the Miscellaneous Fees and Levies Act 2016 provides for a reduced railway development levy of 1.5% on the custom value of goods imported under an affordable housing scheme approved by the CS Finance on recommendation of the CS responsible for matters related to housing.

• Reduced corporate tax rate of 15% for affordable housing developers

The third schedule of the Income Tax Act provides for a reduced corporation tax rate of 15% for a company which constructs at least one hundred residential units in a year of income. The reduced corporation tax rate is only applicable upon approval by the CS responsible for housing.Tax incentives which are no longer applicable.

• Affordable housing scheme no longer exempt from thin capitalization provisions

The Finance Act 2019 exempted company’s implementing a project under an affordable housing scheme from the thin capitalization rules upon recommendation of the CS responsible for housing. This was in recognition of the fact that housing projects are expensive to undertake and therefore the developers would need to heavily borrow from non-resident entities to undertake the projects. Following the enactment of the Finance Act 2021 and the overhaul of the thin capitalization rules, entities undertaking affordable housing scheme are no longer exempt from thin capitalization. This means that the amount of interest they can deduct in computation of their taxable income is limited to 30% of earnings before interest, taxes, depreciation, and amortization.In conclusion, the tax laws still contain several incentives which are meant to encourage development of affordable housing. Critical to taking advantage of this incentives is proper planning and ensuring that the various applications are well detailed to avoid constant back and forth or rejections of applications.

How can we assist

At CM Advocates LLP, we have a team of experienced tax lawyers that offer tax law advisory and tax dispute resolution services. For more information, you can go to our website law@cmadvocates.com or email us at taxteam@cmadvocates.com

Contact Persons & Contribuors

Jane Mugo- Partner & Head of Unit Angela Ndolo-  Associate

Disclaimer

This article is for informational purposes only and should not be construed as legal advice.