•Were SMEs to be subjected to the ordinary tax regime, the tax payable would be significantly higher than under the TOT regime
•TOT is only payable by resident persons whose annual turnover from business does not exceed, or is not expected to exceed, Sh5 million
The National Treasury, via the Finance Act 2019, re-introduced a tax mechanism targeted at Small and Micro Enterprises (SMEs) known as Turnover Tax (TOT). First introduced in 2007, and subsequently repealed, TOT requires SMEs with an annual turnover of less than Sh5 million to account for tax at 3 per cent of their gross monthly sales, on or before the 20th day of the following month, via the iTax platform. The re-introduced tax mechanism is effective from January 1, 2019, therefore the first TOT filing and payment is due on or before February 20, 2020.
A preview of the local dailies over the past week will evidence a misunderstanding of the TOT regime. Touted as an additional tax in various public media, the re-introduction of TOT has seemingly caused a public outcry with the ordinary Mwananchi feeling overburdened by increasingly aggressive tax positions, in the face of already tough economic times. This view, however, as detailed hereunder, is misguided.
From the onset, it is imperative to highlight that TOT is a final tax. Therefore, provided that a business meets the criteria for the payment of TOT, it would be required to account for tax at 3 per cent of its gross monthly turnover, but would not be required to account for tax at 30 per cent of its annual profit. This serves the purpose of simplifying tax compliance, alleviating the tax burden, and additionally widening the tax net by capturing SMEs that were previously not tax compliant.
The above considered, it is noted that the Income Tax Act has provided criteria for the eligibility to TOT. Per the same, TOT is only payable by resident persons whose annual turnover from business does not exceed, or is not expected to exceed Sh5 million. This has been clarified by the Kenya Revenue Authority (KRA) vide various public notices/guidelines noting that TOT does not apply to: persons registered for VAT, persons with businesses income of Sh5 million and above, employment income, rental income, limited liability companies and management and professional services.
With the above in mind, it is clear that TOT is not intended to be an additional tax burden to SMEs, but rather an opportunity for SMEs to pay their fair share of taxes, thus boosting their tax compliance, albeit at subsidised rates. This is expected to widen the tax net in the long term, by capturing the informal sector that has traditionally proven to be difficult to tax. In fact, were SMEs to be subjected to the ordinary tax regime, the tax payable would be significantly higher than under the TOT regime.
It is worth noting that additional tax measures targeted at the informal sector include the presumptive tax regime, introduced by the Finance Act 2018. Per the same, businesses with an annual turnover of less than Sh5 million, among other conditions, are required to account for presumptive tax at the rate of 15 percent of their annual business permit. However, presumptive tax so paid may be utilised to offset against TOT payable.
Karen Kandie – MD IDB Capital