TAXATION

Combination of turnover and presumptive taxes will draw more revenue from informal sector

Lack of proper and formal business structures in the informal sector constitutes the biggest chunk of obstacles in the taxman’s quest to tap revenue from this rich sector.

In Summary

• The first shot towards taxing the informal sector was in 2007 when the Kenya Revenue Authority introduced turnover tax

• To further streamline tax administration the government earlier this year introduced the presumptive tax, which effectively replaced turnover tax

The KRA headquarters at the Times Towers.
The KRA headquarters at the Times Towers.
Image: FILE

One of the biggest challenges that tax administrations in the developing countries face is cracking the nut that is the informal sector.

Despite the vibrancy of the informal sector, the struggle to tap revenue from the sector has been real.

Lack of proper and formal business structures in the informal sector constitutes the biggest chunk of obstacles in the taxman’s quest to tap revenue from this rich sector. The first shot towards taxing the informal sector was in 2007 when the Kenya Revenue Authority introduced turnover tax (ToT). ToT was tailored for business ventures with an annual turnover of more than Sh500,000 but less than Sh5 million.

To further streamline tax administration in the ever-growing informal sector, the government earlier this year introduced another tax, presumptive tax, which effectively replaced turnover tax. Presumptive tax targets business ventures that operate on single business permits or trade licences issued by county governments. Presumptive tax is charged at a rate of 15 per cent on the single business permit or trade licence fee.

Although we are yet  to see a true reflection of the vibrancy of the informal sector in the national revenue coffers, the steps taken by KRA to exhaustively and fully tap the potential of this sector herald a rosy future. One such step is the reintroduction of ToT tax as provided for in the Finance Act 2019. The reintroduction of ToT is a pivotal measure that will complement presumptive tax.

ToT will be payable at a rate of three per cent on gross sales per month by business ventures whose annual turnover ranges between Sh500,000 and Sh5 million. Where a business venture qualifies for both turnover and presumptive tax, the presumptive tax paid will be used to reduce the turnover tax liability, effectively avoiding a double taxation scenario.

With ToT and presumptive tax now in place, the taxman has higher chances of tapping more revenue from the vibrant yet volatile informal sector.       

From Kitui