Turnover and Presumptive tax; what businesses need to know

Turnover and Presumptive tax; what businesses need to know

By Rittah Odhiambo.

Albert Einstein once said that the hardest thing to understand in the world is the income tax. True to his words the income tax and matters of taxation have been quite intricate even for the most shrewd business people in the world.

Since the passing of the Finance Act, 2019, there has been a lot of discussions and debate on turnover tax (ToT) a form of income tax, which has been re-introduced, as well as on presumptive tax. Most business owners are not well informed and conversant with this category of tax.

The main concerns are whether or not they are obligated to remit the tax when they are required to file the tax returns, whether they are exempted or not, how it works, at what per cent and how it will affect different businesses.

Turnover tax shall be payable by any resident person whose turnover from business does not exceed or is not expected to exceed five million shillings during any year of income.

Turnover tax is the tax calculated against the turnover of a business as opposed to the percentage of profit. It shall be 3% of a business’ turnover or the gross sales and it shall be a final tax paid monthly on or before the 20^th day of the preceding month.

It is important to note that there are a number of persons exempted from payment of turnover tax. The tax shall not apply to the income of incorporated companies, rental income, management, professional or training fees and any income subject to a final withholding tax.

With the group of persons exempted and the turnover of business expected to remit the tax, the tax was clearly reintroduced to enable the government tap on the small and medium-sized enterprises and the informal sector, which are growing by the day and are the backbone of the economy and ensure tax compliance for this sector.

Any person liable for turnover tax shall also be liable for presumptive tax that is equal to fifteen per cent of the amount for business permits or trading licenses. Therefore businesses requiring trading licenses and permits shall still remit presumptive tax.

Presumptive tax paid shall offset turnover tax payable, if a business is liable for both turnover and presumptive tax. The presumptive tax shall be payable at the time of payment of business permits and trade licenses. Unlike the turnover tax payable every month, presumptive tax is done annually at the point of renewal.

Just like for every other law, non-compliance creates offences. There is the offence for late payment of the tax which shall attract a 5% penalty on the tax due while late filing shall attract a penalty of KSh 5,000 monthly. The 5% penalty is also applicable to presumptive tax.

The big question is how the Kenya Revenue Association will ascertain the turnover of a business. The act states that a person subject to turnover tax shall be required to keep records necessary for the determination of the tax which should be in accordance to the Tax Procedure Act, 2015.  According to the Act, it is an offence not to keep the business records.

With the kind of business targeted for turnover tax, it is proper to conclude that KRA is going to face a huge drawback as most of the businesses do not really keep their accounting records and do not have the capacity to hire an auditor.

There is also dire need for a simplified tax regime for turnover tax. The presumptive tax has a very simple and straight forward way of filing, making it easy to understand and for KRA to realize.

ToT, on the other hand, is quite complicated, right from the process of registration to the point of filing. It will, therefore, be very hard to have business owners register and even file the returns monthly. Even with the businesses registering, there are high chances that most businesses will undervalue their monthly turnover.

KRA should, therefore, look into incorporating a simple tax administration system and sensitize the taxpayers in order to realize their revenue targets.

Rittah Odhiambo is an advocate of the High Court of Kenya whose speciality and bias is in corporate commercial areas of law. She is currently the Corporate Commercial Lead at Abuor and Associates.

Want to join our growing business network? Book a tour today at any of our branches and check out our amazing packages!Tur