Small-scale farmers will start paying a presumptive tax if the Treasury’s proposals that seek to recruit more taxpayers to meet revenue collection targets are adopted.
The proposal in the draft National Tax Policy will see farmers join informal traders in paying the presumptive tax— paid by business people as a fixed share of their sales.
The principle of presumptive taxation is usually imposed on those whose income is low or those who are not covered under usual tax coverage.
It is aimed at bringing on board small and medium businesses that are sometimes outside the tax net.
Presently, traders with annual sales below Sh5 million are required to pay a presumptive tax at the rate of 15 percent of the single business permit fee issued by county governments when renewing their permits.
For agriculture, the Treasury is seeking to use cooperative societies, which handle farmers’ proceeds, as units for deducting the presumptive tax.
“To progressively increase tax yields from hard to tax sectors, the government will explore ways of enhancing taxation in the agricultural sector and the informal sector, including use of presumptive tax,” says the draft policy.
“Roll out education programmes to farmers and informal sector groups on taxation and business, including registering with respective sub-sector associations and co-operative societies.”
Currently, there is no specific income tax on farmers now and farming income is taxed like any other economic activity Presumptive tax on agricultural produce returns after it was abolished. Previously it was charged at a rate of 3.5 percent before it was repealed.
Agriculture contributes nearly a third of Kenya’s economic output.
Currently, small-scale farmers do not pay income tax on their earnings and the Treasury expects to net thousands of growers, especially those dealing in cash crops like tea, and sugarcane.
The taxman will have to grapple with poor record-keeping among rural-based farmers in what looks set to be chaotic tax collection.
“From the indication of using cooperative societies I think the government is targeting cash crops and the tax will be collected at the point of sale,” Partner Kody Africa LLP and Tax expert Nikhil Hira said.
Experts reckon that the Treasury would rely on existing law to have farmers pay tax.
They said section 15(7) of the income tax law allows taxation of income from agricultural proceeds, adding that the law is yet to be enforced due to farmers’ lack of awareness.
Presumptive tax is considered an advance duty that is later deducted against the turnover tax, which is charged at the rate of one percent tax on their sales for businesses whose annual revenues are below Sh5 million.
The presumptive tax has allowed the Kenya Revenue Authority (KRA) to gather additional data on small traders, allowing easy implementation of the turnover tax.
The informal sector, popularly known as Jua Kali, is deemed to have limited contact with the taxation system save for indirect consumption levies and the Treasury is banking on the turnover and presumptive taxes to plug the revenue loopholes.
Presumptive tax has been key in collecting data on small traders who largely operate informally for the purposes of enforcing the three percent monthly turnover tax.
The micro- and small-sized businesses remain the backbone of the Kenyan economy and the largest contributor of new jobs despite largely operating in informal settings.
The Kenyan economy is dominated by subsistence agriculture and a large informal sector, which are difficult and uneconomical to tax.
Whereas the informal sector is expanding, its contribution of tax revenues remains low as it is largely cash-based and characterised by poor record keeping.
This has led to overreliance on the formal sector for tax revenue that grew by 21.7 percent or Sh148.9 billion to hit Sh2.03 trillion.
Income tax levied on individuals and corporates constitute 47 percent of ordinary taxes at an average of Sh555.6 billion over the last 10 years.
The new policy is meant to expand the tax base, including increasing the number of taxpayers from 6.1 million to 8.2 million by next year.
The proposals include using the Sacco movement to get to the farmers as well as collaborating with county governments to identify the new taxpayers.
“The government will explore ways of enhancing collaborations and exchange of information on taxpayers between the national government and county governments,” says the draft policy.
