What is Turnover Tax TAXATION FOR SMALL TRADERS 19/02/2020

In accordance with the Finance Act, 2019, the Turnover Tax (TOT) has been re-introduced and will be payable from 1st January 2020.

Who should pay TOT?

TurnoverTax (TOT) is payable by any resident person whose turnoverfrom business does not exceed or is not expected to exceed Kshs 5,000,000 during any year of income.

TOT does not apply to:

Persons registered for VAT

Persons with business income of Kshs 5,000,000 and above,

Employment Income,

Rental Income,

Limited Liability Companies,

Management and Professional Services among others.

What is the rate for Turnover Tax (TOT)?

The tax rate for TOT is 3% on the gross sales/turnover and is a final tax.

Filing of TOT Returns

TOT will be filed and paid on a monthly basis. The due date is on or before 20th of the following month.

Taxation of Micro, Small and Medium Enterprises (MSMEs) has been the bane of most tax administrators across the world- largely because it comprises of the informal sector. This has been more so in developing countries. Studies show that MSMEs continue to command a substantial share in economic development of most countries.

In a study titled Taxing the Informal Sector published in 2014Anuradha Joshi et.al attribute the challenge that has been taxation of the informal sector to two key factors. The first factor is high compliance costs compounded by complex tax administration processes that do not necessarily suit the sector. The second factor is high cost of collection by the tax administration. The investment focus ends up bringing back very little revenue, which does not make much economic sense.

A 2016 survey conducted by the Kenya National Bureau of Statistics (KNBS) titled National Micro, Small and Medium Establishment (MSME) Survey established that over 90% of all established businesses in Kenya are SMEs – i.e. about 7.41 million enterprises being 1.56 million licensed MSMEs and 5.85 million unlicensed businesses. In terms of employment opportunities, the survey further established, MSMEs were a source of livelihood to about 84% of Kenya’s total workforce being 14.9 million Kenyans contributing 28.5% to GDP. From these two economic contribution facets, the contribution of MSMEs cannot be overstated.   

Despite this significant economic contribution, there has been very little to write home about with respect to revenue contribution of MSMEs in the national revenue kitty. According to experts, lack of suitable tax administration mechanisms that dovetail with the informal nature of these enterprises tops the list of reasons why MSMEs remain a hard nut to crack. Most of the tax administration tools in place are perceived to be a preserve of formally structured enterprises and therefore unsuitable for the characteristically informal MSMEs.  

Nonetheless, MSMEs remain a rich unexplored land of tax base expansion opportunities, which with the appropriate revenue mobilisation mechanisms in place, has a tremendous potential to pivot the national revenue collection. For a while now, Kenya has made several attempts at establishing taxation mechanisms specifically tailored for this sector as a tax base expansion mechanism. The first shot was the introduction of turnover tax in 2007. Turnover Tax (ToT) as the name suggests, is based on the gross turnover or sales.  ToT was charged at a rate of three per cent on the gross sales and targeted business enterprises that had an annual turnover that exceeded Sh500,000 but less than Sh5 million.

Following what experts termed below par performance as a tax collection mechanism, ToT was repealed in 2019 through the Finance Act of 2018 and effectively an alternative tool, presumptive tax, was introduced effective 1st January, 2019. Presumptive tax was charged at a rate of 15 per cent on the trade licence or single business permit fee. It was paid once in a year upon renewal or application for a single business permit or trade licence. One year later, through the Finance Act 2019, ToT was reintroduced and was to be charged alongside presumptive tax. Presumptive tax was paid as an advance tax that was offset against the ToT liability.

Fast forward to the recent tax changes that have been informed by the need to cushion Kenyans from the effects of the Covid-19 pandemic, the government has made further changes to ToT and presumptive tax provisions. The Tax Laws (Amendment) Act 2020 has repealed presumptive tax. The rate of ToT on the other hand has been reduced from three per cent to one per cent. According to the new provisions, business enterprises that qualify to pay ToT must have an annual turnover exceeding Sh1 million but less that Sh50 million. Further, under the new ToT provisions, limited lability companies whose annual turnover falls under the new threshold will now pay ToT. In the previous provisions, limited liability companies were among exemptions from ToT as they were already in the corporation tax regime.

Compared to the earlier threshold which targeted businesses with an annual turnover not exceeding Sh5 million, the expanded ToT threshold is a big win in the government’s quest to tap revenue from MSMEs. This owes to the fact that majority of the business enterprises’ annual turnover falls between Sh1 million and Sh50 million.

Note

TOT payers are also liable to pay Presumptive Tax at a rate of 15% of the Single Business Permit fee payable or licence payable. However, Presumptive Tax paid will be offset against the TOT payable.

Eligible taxpayers are advised to log onto iTax, add the TOT obligation, file the monthly returns and make payment.