Taxation on Donations – Finance Act 2022/2023
People often consider tax collection as legalized robbery but despite having to pay more than is considered necessary in some instances, most citizens do comply with their tax obligations as non-compliance can lead to serious consequences. Nevertheless, due to recent changes in the law, some organizations and firms such as those making donations to charities or Non-Governmental Organizations qualify for tax relief.
Before the Finance Act 2022/2023 came into effect, for these firms to qualify for a tax relief the donations had to be made to Charities and NGOs that are registered. If not, the firms could not claim a deduction of the cash donations against their taxable income and this non exemption discouraged donations. With the recently enacted Act, there is reprieve for the poor and vulnerable Kenyans as there were some changes made that affect firms donating to unregistered charities. These changes help charitable organizations who were left with minimal or no resources – due to a falling economy and the effects of the post Covid-19 pandemic – to assist the poor and vulnerable in our country.
Taxation changes introduced by the Finance Act 2022/2023
So what are these changes introduced by the Finance Act 2022/2023 and why are they so important?
On 7th April 2022 the Cabinet Secretary of Treasury and planning gave the Budget statement for the financial year 2022-2023 to the National Assembly. The CS proposed changes and amendments to the Income Tax Act Cap 470 (The Income Tax Act) that would allow institutions donating to organizations that deal with charity be allowed to claim a deduction of such donations from their income that is taxable. This being due to the fact that such Organizations play a supportive and important role to the vulnerable. The purpose of such organizations centers on their charitable intentions, social welfare and research and development in crucial areas such as education or relief of poverty.
Which Donations Qualify for Deductions?
The Finance Act 2022/2023, amended section 15(2)(w) of the Income Tax Act – added a clause which states that any donation to a charitable organization whose income is exempt from tax under Paragraph 10 of the first schedule to the Income Tax Act, or to any project approved by the Cabinet Secretary responsible for matters relating to finance may be deducted from taxable income.
Charities and Non-profit Organizations are registered under various laws depending on the their nature and type, for example Charitable trusts, Public Benefit Organizations; Companies limited by guarantee and some of the legal statutes that govern them include Trustees Act (Perpetual succession) Cap 164, Companies Act , Income Tax Act and the Finance Act.
A number of people believe that the funds and donations should be channeled towards the targeted project and not syphoned out as tax; since if not used for intended purpose, it affects the targeted beneficiaries.
Despite this, the law is the law and thus the local legislation is crucial as tax rights, exemptions and penalties are provided for by these laws. Furthermore, organizations that have not been granted the exemption certificate should account for some taxes such as income tax, and withholding tax and file their tax returns to avoid penalties.
Tax exemptions and necessary certificates can be hard to obtain if not provided for by law and thus organizations should be well versed with the legal basis of their exemptions so as to prevent any future liabilities. Some of the consequences of non-compliance include sanctions, penalties and interest as well as Reputational risk.
Charities, Non-Governmental organizations and Non-Profit Organizations are very important to a society and should be lawfully assisted in every way possible. The charity sector is important as it leads to job creation, improved standards of living via donations and development of sectors in the economy such as health and education. The amendment to increase the number of firms that qualify for tax reliefs will be welcomed by several as the previous laws around non-exemption were held to be rigid and against the basic concept of morality- that which is right or wrong. This amendment has faced little backlash as it acknowledges and appreciates the efforts made by these organizations in improving the wellbeing of the society. That is why in some instances as Bill Archer said, “We must care for each other more and tax each other less.”
How we can help
We shall be pleased to assist your company in setting up a Non-profit making organization and facilitate the acquisition of a Tax Exemption Certificate to facilitate ease of business in the organization.