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January 21, 2019

New tax raises SME overheads

Kenya Revenue Authority Commissioner General John Njiraini and National Treasury CS Henry Rotich when they appeared before the National Assembly and Senate joint committees on trade and agriculture on June 25 last year/JACK OWUOR
Kenya Revenue Authority Commissioner General John Njiraini and National Treasury CS Henry Rotich when they appeared before the National Assembly and Senate joint committees on trade and agriculture on June 25 last year/JACK OWUOR

The 15 percent Presumptive Tax on small businesses will raise the cost of living by 1.5 to three percent for households, according to tax experts.

However on the flip side, the experts say it will help the Kenya revenue Authority widen its tax bracket by capturing the undocumented informal sector.

The Institute of Public Finance chief executive James Muraguri said the new tax which took effect on January 1 will increase the cost of businesses for micro SMEs by 15 percent, which they are likely to be pass on to consumers.

"A small scale trader whose annual business permit is Sh5,000 will have to pay at least Sh750 every year. The trader will have to factor this cost in pricing, meaning consumers will have to bear the burden,’’ Muraguri said.

The Presumptive Tax announced by National Treasury CS Henry Rotich in the 2018/19 budget adds to other tax policies in the Finance Act 2018 that are eating into household budgets.

On September 21, President Uhuru Kenyatta signed into law the Act which introduced eight per cent Value Added Tax on petroleum products, 1.5 per cent levy for the National Housing Development Fund and the Sh18 a litre kerosene adulteration levy.

The housing levy is currently on hold after it was challenged in court

The Act also imposed a 20 percent excise tax on sweets and chocolates, increased excise tax on cash transfer from 12 per cent to 20 per cent, and that of calls and data from 10 to 15 per cent.

 Grace Muchiri, a senior tax consultant with Ernst & Young said the government should consider the overall impact of the tax on Kenyans making less than a dollar a day.

She said that in Uganda and Tanzania, the tax laws provide designated bands indicating how much Presumptive Tax is payable according to how much income one earns.

She however terms the government’s move to replace turnover tax on small businesses with a the Presumptive Tax as an effective way to tax undocumented informal sector. 

Initially, KRA expected small business with an annual turnover of less than Sh5 million to pay three percent in turnover tax.

The tax collector faced logistical challenges to implement turnover tax as it was based on self-declaration. 

According to Muraguri, KRA hit two birds with a single stone. By allowing counties to charge 15 percent on business permits, the taxman managed to solve logistical issue and will manage to net small businesses in counties into tax bracket.

‘’This means kiosk owners and other smaller businesses will be compelled to have KRA PINs and forced to file tax returns. It was a genius way to bring informal sector into tax bracket,’’ Muraguri said.

On Monday, KRA told a local paper that it expects to collect Sh2 billion from presumptive tax this financial year.

 

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