In January this year, the Government reintroduced the three percent turnover tax targeting close to 2.5 targeted million businesses in the informal sector.
Turnover tax was first introduced in the Kenyan taxation framework in 2007 with a view to tap revenue from the slippery and volatile informal sector. However, its implementation soon faced a number of challenges which eroded its efficacy.
The reintroduction of turnover tax was, therefore, intended to widen the tax base by tapping into the informal sector while also simplifying the taxation regime for small and medium businesses. Besides the tax, the government also revamped the presumptive tax and simplified it for implementation in the informal sector.
It is worth noting that these taxes are complementary. The presumptive tax is charged at a rate of 15 percent of the single business permit or trade licence fee and payable upon application or renewal of the licence. Unlike other taxes, it is a final tax and does not require filling of a tax return thereby enhancing compliance.
Turnover tax on the other hand is charged at the rate of three percent on gross sales for any resident person whose annual gross sales do not exceed Sh5 million.
According to the law, businesses that qualify for turnover tax are required to file and pay the tax by the 20th of every month at three percent on the gross sales.
The returns are done electronically through the Kenya Revenue Authority’s i-Tax platform. In instances where a business qualifies for both presumptive tax and turnover tax, the presumptive tax paid will be used to offset ToT payable.
The reintroduction of these taxes was aimed at enhancing the government’s revenue collection by widening the tax base thereby enabling the government to effectively implement its programmes.
Indeed, a number of commentators and studies have shown that the majority of taxpayers in Kenya are in the formal sector despite the fact that the informal sector employs majority of Kenyans. Bringing the informal sector in the taxation regime is, therefore, commendable.
However, in so doing, the Kenya Revenue Authority (KRA) should ensure that the process is simple, accessible, easy to administer and enforce. Unfortunately, having considered the two tax regimes, the presumptive tax seems to be the only one fitting the bill than the turnover tax.
The challenges experienced in the past in its implementation are easy to address and compliance levels are likely to be high.
Turnover tax on the other hand is counter-productive and negates the government’s goal of reducing poverty for the following reasons. First, turnover tax is pegged on gross sales in a month. It, therefore, requires proper management of records for ascertainment when in fact many small businesses rarely keep records of every transaction.
Indeed, this would require knowledge and skills in records management that would certainly be lacking in many of these businesses. This is likely to increase the cost of business and encourage speculation of turnovers for business for purposes of compliance.
Second, the basis of turnover tax at three percent of the gross sales instead of the turnover profit is oppressive, discriminatory and presupposes that every such business makes profits. It is a known fact that some of these businesses enjoy marginal profits such that charging a levy of three percent on the gross sales would eat into their profits and even the capital thereby driving them out of business.
Third, turnover tax requires returns to be made by the 20th of every month through the i-Tax platform. Whereas KRA has simplified the process, it is still complicated for many taxpayers. This requirement fails to appreciate the prevailing circumstances and presupposes that the people are techno savvy and have access to the internet.
In essence, turnover tax will increase the cost of doing business since the traders will have to pay to make returns. It will also encourage brokerage services for purposes of compliance hence encouraging fraud and low compliance levels.
Fourth, the administration of turnover tax is likely to be problematic and lead to malpractices including rent seeking.
The geographical spread of these businesses will certainly create numerous challenges in monitoring and enforcing compliance. Will KRA send its staff regularly to enforce and monitor compliance? Does KRA have capacity to undertake this task? In the event this happens, it will increase the cost of implementation and human interface which has been found the worldover to promote rent seeking.
Edward Cedric Opany, development communication specialist.