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Economy

Loss-making firms face 1pc revenue tax

minimum tax
The proposed levy to be known as minimum tax will take effect January 2021. FILE PHOTO | NMG 

Treasury Secretary Ukur Yatani is targeting a share of revenue from loss-making firms in an environment where profits have been hammered by global coronavirus shocks.

In proposed changes in the Finance Bill 2020, Mr Yatani is seeking the green light from Parliament to compel firms which have not been taxed elsewhere to pay one percent of gross sales to the Kenya Revenue Authority (KRA).

The Bill contains new measures which will help generate new revenue to partly fund the Sh3.2 trillion budget.

The proposed levy to be known as minimum tax will take effect January 2021 and is largely targeted at companies which do not pay corporate income tax, which is based on profit.

This comes on the back of revelation that more than 90 percent of companies failed to pay corporation tax in the year ended June 2019.

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KRA data in August 2019 showed that out of 401,306 companies registered for corporation tax in the period to June, only 33,426 paid taxes on their net income.

"The intention of this is to bring on board companies who earn income from Kenya, but end up declaring losses perpetually to avoid payment of corporate taxes," Mr Yatani explained.

"This will enable such entities to contribute to the development at a bare minimum of one percent of their turnover."

The proposed tax spares individuals and companies whose income is taxed under Section 5 (employment), 6A (residential income tax), 12C (turnover tax for small-sized firms) as well as capital gains and proceeds from mining or oil exploration taxes.

Tax consultants have, however, argued that the proposed taxes should not apply to newly established firms and those with low profit margins as this may pile operating costs rather than tax on earnings. This may result in cash flow challenges for newly-established firms.

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