• Kenya Association of Manufacturers, the Retail Trade Association of Kenya and the Kenya Flower Council say MPs and KRA did not consider the impact that taxes will be levied on taxpayers whether or not a profit is made.
• They contend that the situation will be worse where a company is in a loss-making position.
Manufacturers have challenged the newly introduced one per cent blanket minimum tax.
In a petition filed in court, the Kenya Association of Manufacturers, the Retail Trade Association of Kenya and the Kenya Flower Council say the National Assembly and the Kenya Revenue Authority did not consider the impact of the tax. They say it will be levied on taxpayers whether or not a profit is made.
“Even where there is a profit, the minimum tax risks having a taxpayer pay all the profit earned as tax where the profit made after expenses is less than one per cent of the gross turnover. This is an absurdity,” says KAM.
They contend that the situation will be worse where a company is in a loss-making position.
“The company will be expected to pay the minimum tax at the rate of one per cent of the gross revenue. In addition to the loss position, the company has the additional liability to pay tax. If the company does not pay minimum tax, the interest and penalties under the ITA start accruing.”
On June 30 last year, President Uhuru Kenyatta assented to the Finance Act, 2020, which amended the laws relating to various taxes and duties. Key among them was the amendment to the Income Tax Act, which introduced a new section announcing a minimum tax at the rate of one per cent of the gross turnover effective January 1 this year.
The effect of the introduction of the minimum tax is that since it is based on gross turnover and not gains or profits, all persons, even those in a loss-making position, will be required to pay minimum tax.
Court documents indicate that the introduction of the new section requires a taxpayer to pay income tax based on the highest of 30 per cent of net profit or one per cent of gross revenue. With the latter, there is no possibility to deduct production costs and operational expenses that were already part of the provisions in the ITA.
Manufacturers are apprehensive that unless implementation of the new section of ITA is suspended, KRA will proceed to enforce the amendment.
KRA has since issued demand notices requiring compliance with the impugned amendment and has issued guidelines providing that any person whose income is not exempted from minimum tax must declare turnover for each period in the iTax module.
But KAM says: “The minimum tax is a death nail to small and medium enterprises as it discriminates against persons with lower profit margins and consequently persons with lower incomes.”