Turnover tax penalised good as well as the bad

In Summary

• On Monday the High Court ruled that the one percent turnover tax was unconstitutional

• The minimum tax could have pushed businesses into bankruptcy if they were just breaking even

Turnover tax to expand revenue base
Turnover tax to expand revenue base
Image: OZONE

On Monday the High Court ruled that the minimum tax was unconstitutional.

The one percent tax on turnover was introduced by the KRA in January 2021 and was expected to generate Sh21 billion in tax revenue annually.

However the turnover tax was inherently unfair. It targeted companies who are not paying corporation tax because they are not profitable. The KRA assumes that anyone declaring losses is a tax cheat yet in most cases it will just be a business struggling to survive.

The turnover tax was a potential killer, especially for companies with low profit margins on turnover such as shops, bars and petrol stations. This tax unfairly punished legitimate businesses that are barely breaking even.

The KRA says that the turnover tax is necessary to catch tax cheats. But this is a self-defeating argument. Firstly, a fraudulent business can still under-declare its revenue. Secondly, the KRA should be capable of identifying falsified accounts and collecting any taxes due.

The turnover tax was a crude instrument that penalised law-abiding taxpayers without necessarily catching tax dodgers. The KRA should not seek to reinstate it.

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