MPs have moved to spare small businesses and farmers the trouble of having to issue electronic tax invoices, removing a compliance hurdle that had made it difficult for micro traders to supply big companies with goods and services.
The National Assembly Finance Committee has recommended that businesses with annual sales of below Sh5 million be exempted from the Kenya Revenue Authority’s electronic tax invoice management system (eTIMS).
Big firms have been dropping small traders without the ability to generate eTIMS as their suppliers in the push to be compliant pliant with the law.
The law demands that all suppliers, irrespective of their size, must issue an electronic invoice to show proof of sales, which will also reflect at the KRA as an expense for the big firms buying goods and services.
Now, the big firms buying goods and services from suppliers with annual sales of less than Sh5 million will be responsible for producing the electronic invoice, if Parliament approves the committee’s recommendations.
The proposals by the committee followed public input on the Tax Procedures (Amendment) Bill, 2024 that is before Parliament.
“This is because the eTIMS requirement is proving to be very difficult to implement, especially for farmers, many of whom do not maintain any records for their supplies and do not even have PIN numbers or bank accounts since their payments are generally made through M-Pesa if not in cash,” the Kenya Association of Manufacturers (KAM) told the Finance Committee in submissions.
“Additionally, it is not practical to require businesses to obtain eTIMS for certain transactions such as matatu or bodaboda expenses.” The Finance Act, 2023 imposed a requirement on businesses to issue electronic tax invoices through eTIMS.
Expenses not reflecting on eTIMS would not be accepted as costs for calculation of corporate income tax in efforts to curb tax cheating.
More than three-quarters of registered companies snubbed eTIMS, dealing a blow to efforts to drive compliance and curb tax evasion.
The KRA said 120,000 registered taxpayers with business income signed up to eTIMs in the year to June, representing 18.1 percent of the about 663,000 firms in taxman’s books, according to an internal document seen by the Business Daily.
This means an estimated 543,000, or 81.9 percent, of registered firms in the KRA register did not subscribe to eTIMs, which is mandatory to support deduction of business expenses for corporate income tax purposes.
The system, which demands businesses to file receipts or invoice with the KRA as proof of expenses, is aimed at widening the tax base as big companies report to the authority small firms that act as their suppliers.
It also helps curb the practice where big firms inflate their sales and narrow profits in the push to pay lower taxes.
Lawmakers amended Section 16 of the Income Tax Act through the Finance Act 2023 that required businesses from January to produce electronic receipts to deduct operating costs such as wages to employees, utilities, supplies, travel, marketing and advertising expenses.
Following an outcry from businesses, the registration deadline was extended to March, meaning all businesses were to onboard eTIMs from April 1 whether they are registered for value added tax obligations or not.
This has allowed the taxman to monitor business transactions on a near real-time basis, enabling them to flag discrepancies in income tax returns filed by firms.
Tax consultants largely attribute the low uptake of eTIMS for business expenses to the majority of smaller firms “lacking the technical infrastructure or understanding to comply swiftly”.
In an announcement ahead of the amendments, the KRA said it expected to list about 51 percent of businesses in its register to eTIMS within the year ending June 2025.
Consultancy firm KPMG say the amendments will offer relief to small traders whose survival was at stake for non-compliance with eTIMS.
“By proposing an alternative invoicing method for taxpayers who are supplied by small scale business owners and farmers. The bill could potentially address the issue of small business owners and farmers going out of business for not having eTIMS compliant invoices,” said the global audit firm in notes on the amendments.
Small and medium-sized businesses are the backbone of Kenya’s economy, generating the bulk of jobs in an economy where the formal sector is struggling to create employment for thousands of graduates.
The informal sector accounted for 85 percent of all jobs created last year at 720,900 jobs compared to 122,800 created in the formal sector.
Businesses whose annual sales are less than Sh5 million fall outside the bulk of corporate taxes, including being spared registration for value added tax (VAT).
Analysts at PwC had cautioned that small businesses would run into headwinds in dealing with other businesses eTIMS compliance hurdles.
“It is noted that no consideration has been given to small businesses that deal with other businesses, as such, businesses may be challenged on raising eTIMS compliant invoices or carrying out reverse invoicing,” PwC said in a note.
eTIMS is a software solution that provides taxpayers with options for a simple, convenient and flexible approach to electronic invoicing.
