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EXPANDING TAX BASE

Let’s look at turnover tax more objectively

Co-existence of ToT and presumptive tax does not amount to double taxation.

In Summary

• ToT is not a new tax. It has been in place before it was replaced by the presumptive tax on January 1, 2019. ToT was first introduced in 2007.

• In the new dispensation, the presumptive tax paid will be an advance tax, which will be used to defray ToT payable in a given month.

The Kenya Revenue Authority's head office at Times Tower.
The Kenya Revenue Authority's head office at Times Tower.
Image: FILE

Of all the provisions contained in the Finance Act 2020, the reintroduction of turnover tax has mustered the lion’s share of the attention of Kenyans.

To many, the return of turnover tax could be the only provision in this act.

Countless editorials and commentaries decrying the reintroduced tax have been the order of the day in virtually all print and electronic media platforms.

The Kenya Revenue Authority, the implementer of tax laws passed by the August House, has never been more castigated. The flak in the taxman’s plate is immeasurable.

Nonetheless, in the midst of the storm of how ‘KRA is scheming to use turnover tax to cripple the business ventures of small and medium enterprises’, we need to cut the taxman some slack and look at this issue more objectively.

It is important to highlight some facts about turnover tax, which have either been replaced by spins or have tactfully and deliberately been overlooked by the circles opposed to the tax.

First, ToT is not a new tax. It has been in place before it was replaced by the presumptive tax on January 1, 2019. ToT was first introduced in 2007.

Speaking of presumptive tax, it is important to clarify something about the coexistence of these two taxes.

Presumptive tax is charged at 15 per cent the value of a single business permit or trade license. In the new dispensation, the presumptive tax paid will be an advance tax, which will be used to defray ToT payable in a given month.

Therefore, contrary to the position imposed by some commentators, the coexistence of ToT and presumptive tax does not amount to double taxation.

Globally, the informal sector has been giving the formal sector a run for its money in various economic facets.

When you look at the employment opportunities facet, the informal sector leads the pack. Some studies show that in Kenya, the informal sector accounts for more than 75 per cent of all employment opportunities.

In terms of contribution to the Gross Domestic Product (GDP), the informal sector commands a substantial share. A 30-40 per cent GPD share, as economic scholars have unanimously and consistently reported, is no mean feat.

Whichever way you look at it, therefore, the vibrancy of the informal sector cannot be overstated. Due to the informal nature of the sector, however, it has been an uphill task for most revenue administrators in the world to exhaustively bring sector players on board the tax bracket.

As a result, tax compliance has been on the lowest of lows. Consequently, the vibrancy of the sector has not been truly reflecting in the national revenue coffers. Why not leverage on ToT to bring this sector on board then?

The informal sector should recognise and prioritise tax payments. For the longest time, several players in the informal sector have placed the payment of taxes amongst the lowest items in their list of priorities.

This shall require the development of introspection and acceptance of the need to take up their share of responsibility.

Time and again, KRA has been accused of milking the one and only cow dry. ToT and presumptive tax are significant tax-base expansion measures, which give the government an opportunity to explore more potential revenue reservoirs.

The beauty about expanding the tax-base is that it eases the tax burden on the existing taxpayers. While at it, it is a crucial step towards the miles journey of bridging the glaring wide gap between the actual taxpayers and the country’s total population.

If you looked at the number of registered taxpayers in the KRA database vis-à-vis the current Kenyan population, the picture painted is of a country of over 47 million people supported by a handful of the population.

Having more individuals contributing to the preparation of the dough from which the national revenue cake is baked will, therefore, definitely not hurt. On the contrary, it is for the good of all of us.

Further, an unwritten tax law has it that the more evenly shouldered the tax burden is, the higher the prospects for lower rates of the existing tax heads. Without an ounce of doubt, lower tax rates across board would be the most melodious tune in the ear of every taxpayer.

That way, we will not be looked at as a man who steps into a basket and tries to lift himself up.

For the above to be attained there must be the requisite goodwill from all quarters including political goodwill.

All in leadership must be at the forefront in demystifying the need for shared responsibility by all who fall under the tax bracket. Turnover tax is one sure way of ensuring an evenly shouldered tax burden.

That said, there is a dire need to relook at the whole issue of turnover tax before we lose focus. Should there be a single issue that needs to be addressed for ToT to work effectively, the concerned stakeholders need to seek an audience with KRA and the government at large to iron out the issue.

This country belongs to all of us and if we approach a taxation issue such as this from a political angle, we will forever rely on foreign aid to support our development agenda yet we have the relevant resources and potential to do this.

Ms Chemutai is a Legal and Policy Analyst and regularly comments on topical regulatory, and economic issues. Email: [email protected]