Recently while waiting to be served in a shop I overhead the seller arguing with a customer who was bargaining for bulk purchase in low tones. The seller told him that if he reduced the price, he would not issue an ETR (electronic Tax Register) receipt.
The customer seemed in a dilemma. He wanted to pay less and have a receipt at the same time and the seller insisted on him choosing one. I knew the seller was trying to avoid paying VAT, Value Added Tax.
Despite its popularity, it seems VAT is one of the least understood tax by most of small traders who try to avoid it to their detriment.
VAT is s tax levied on some goods by the Kenya Revenue Authority and is paid by the consumer, not the seller. VAT has no effect on business except making products expensive to the customer.
It is mandatory for all businesses with annual turnover of more than Sh5 million to register for, and charge customers VAT, which they collect on behalf of KRA and remit it by 20th of the following month.
Remember as a seller you only act as an agent to collect it on behalf of KRA. The VAT is paid by the final consumer not you. This means when you buy stock you pay VAT of 16 percent. When you sell, you are required to charge 16 per cent. You are supposed first to deduct the 16 percent you paid when buying your stock and remit the balance to the KRA.
This means if you are not registered you cannot claim the VAT you paid. Also, you cannot charge VAT and issue ETR if you are not registered.
Taking short cuts in compliance issues such as failure to register as a taxpayer with relevant tax obligations such as VAT, income tax, and PAYE does not benefit your business in any way. It limits your growth, makes you lose money and puts you at risk of paying heavily should the tax man get you, and this could be an issue of when, not if.
Tax non-compliance is one of the key things that could ruin your business as you grow. Fortunately, compliance is not as hard as some people portray it. The only obstacle is ignorance.
As a business, it is key to know your compliance requirements and move with speed to comply as you build your business.
The first step in compliance starts by choosing the right structure of your business. If you can register your enterprise as a business name or company. Business name is typically for sole proprietorship or partnerships and does not have an identity independent of its owners. So, it does not have a pin or separate tax obligation from that of the owners.
KRA has a department dedicated to educating traders on various tax obligations and compliance free of charge. Be informed and save money as you grow your business.
PAYE Tax Calculator
Note: The results are not exact but very close to the actual.
