What Presumptive Tax means for small businesses

Presumptive Tax
Presumptive Tax will be payable at the rate of 15 percent of the Single Business Permit. FILE PHOTO | NMG 

Over the past few years, we have seen a raft of changes in the tax legislation by the Government as it seeks to enhance revenue collection with a view of implementing the ambitious Big Four Agenda.

To this end, Kenya Revenue Authority (KRA) launched the Seventh Corporate Plan 2018-2021 aimed at realising fresh strategies focused towards tax base expansion, improvement of customer service, combating illicit trade and dealing with internal resource development.In my view, one of the major areas of focus has been to widen the tax base and to capture the informal business sector.

The Finance Act 2018, sought to replace Turnover Tax (ToT) with the Presumptive Tax. ToT was applicable to businesses whose turnover did not exceed Sh5 million in a given year of income and was payable after every three months commencing in each calendar year at a tax rate of three percent of the gross income.

However, Presumptive Tax will be payable at the rate of 15 percent of the Single Business Permit to all persons who are issued or liable to be issued with a business permit or trade licence or renewal of license by the county government in a year of income.

The turnover of this business should not exceed Sh5 million. This has seen the recent issuance by the KRA on 4 December 2018, a Public Notice informing all persons affected as outlined above that Presumptive Tax shall become payable with effect from January 1, 2019.

However, Presumptive Tax will not be applicable to a person whose income is exempt from tax under the First Schedule of Income Tax Act and has a valid exemption certificate; a person who would otherwise pay tax under this regime but elects by notice in writing to the commissioner not to be subjected to the Presumptive Tax; a resident person whose gross turnover from business exceeds Sh5 million in a year of income; and any income derived from management and professional services, or rental business, or incorporated companies.

Based on the above, a Personal Identification Number (PIN) will be required when applying for a new or renewal of a single business permit or trade licence issued by the county government to pay 15 percent of the cost of business permit fees as Presumptive Tax.

The KRA has made the process easier by designating a tab on their website for taxation of small traders by providing a step by step guide for payment of Presumptive Tax. As such, a taxpayer shall be required to log onto the iTax platform to generate a Payment Registration Number (PRN) under Presumptive Tax payment, after which payment can be done via the payments platforms convenient to them.

It is important to note as per the Tax Procedures Act that late payment of Presumptive Tax attracts a penalty of five percent on tax due and late payment interest of one percent per month.The KRA, in implementing the change in legislation has identified means of netting a large number of businesses in the informal business sector that have been in operation but do not have PIN numbers or where they have not been tax compliant.

Such business owners will be required to obtain the same so as to pay the Presumptive Tax when acquiring or renewing single business permit or trade licence issued by the county government.

ERICK KINOTI, Managing Director and Tax Expert, TruQuantum Consulting.