Small-scale businesses and companies with annual sales of below Sh500,000 will be exempted from paying the one percent sales tax as part of a series of measures as part of measures to cushion them from the impact of the Coronavirus pandemic, according to the tax reliefs draft bill that the Treasury has presented to Parliament for approval.
The sales tax, which was reintroduced in January, will not capture the smallest of traders after the State increased the cap for those liable to pay the levy from the current Sh5 million annually — or Sh416,600 per month — to Sh50 million per year.
That means Small and Medium Enterprises (SMEs) will be liable to pay the one percent turnover tax (TOT)
The review of the sales tax is contained in the Tax Laws (Amendment) Bill, which offers legal backing to the tax reliefs announced by President Uhuru Kenyatta last month, which include lower income tax for salaried employees in the formal sector and a reduction in corporate tax for large organisations.
Traders operating small and mid-sized businesses will also now pay one percent tax on their sales to the Kenya Revenue Authority (KRA), down from the three percent rate introduced in January, a move that looks set to ease the pain for enterprises struggling with low revenues.
The exemption of traders with revenues of less than Sh500,000 per month in sales will be a relief for those who run kiosks, grocery stores, salons or any other mini and small scale family businesses. Since January 1, these traders have been paying three percent of their sales to KRA, irrespective of whether they are selling at a profit or loss. This meant for every Sh1,000 they generated as revenue, they had pay Sh30 to the taxman at the end of the month.
“Raising the floor to Sh500,000 will offer relief to small traders, but raising the cap to Sh50 million will expand traders who could not be paying their fair share of taxes,” said Nikil Hirra, a tax expert at Bowmans Kenya.
The small traders will also be spared the presumptive tax at the rate of 15 percent of the value of annual single business permits issued by county governments if the MPs approve the changes in the Bill. The House reconvenes next week to deliberate on the bill.
The tax changes are geared at lowering the cost of basic items while providing workers with additional income for spending to boost consumption and sales of traders.
The small and mid-sized businesses remain the backbone of the Kenyan economy and the largest contributor of new jobs in an economy where big corporates have frozen hiring while some have shed jobs or scaled down operations to protect profits.
When it was introduced, analysts faulted the three percent turnover tax, saying it would saddle small traders with additional operating costs. The sales tax was expected to provide the KRA, under pressure to collect additional revenue, with a fresh avenue for raising taxes from players this segment, the majority of whom have not been paying State levies.
The Treasury had in 2018 dropped the turnover tax due to its poor performance as most traders failed to make revenue disclosures. It replaced the sales levy with a presumptive tax at the rate of 15 percent of the single business permit fee issued by county governments. The presumptive tax allowed KRA to gather additional data on small traders, setting the stage for the return of the turnover tax.
The informal sector, also known as Jua Kali, is deemed to have limited contact with the taxation system, save for indirect consumption levies and the Jubilee administration had been banking on turnover taxes to plug revenue loopholes.
But the small traders have suffered from the modest economic activity that has cut cash flow and hit business sales due to the Coronavirus pandemic that has hit businesses globally and whose effects are likely to worsen the business condition for the small traders. This is why the government is offering the tax reliefs that Parliament has been asked to approve.
Kenya has so far confirmed 110 cases of the COVID-19 disease and three deaths. Its critical tourism and farm export businesses have been feeling the pinch from the economic impact of the coronavirus outbreak.
The government has responded to the coronavirus by tough travel restrictions, prohibiting mass gatherings and imposing a night curfew among others to contain the disease.