During the 2018-2019 Kenya National budget speech on 14th June 2018, the Cabinet Secretary (CS) for the National Treasury proposed introducing a Presumptive tax to replace Turnover tax.
Presumptive tax is not being introduced in Kenya for the first time. It is a tax that has been used in Kenya before. The tax is also used in other countries across the world, such as India.
This post will explain the introduction of the presumptive tax in Kenya. But first things first.
What is a turnover tax?
Turnover tax (TOT) will be replaced by Presumptive tax. TOT is not a tax but a method of collecting tax. TOT was introduced in Kenya to enable small businesses to comply with income tax provisions.
The businesses eligible to pay tax under TOT have annual turnovers of less than kshs 5,000,000 but more than kshs 500,000 per year. However, one can opt out of the system with permission from the Commissioner.
Among those businesses, some are prohibited from registering for TOT, such as service suppliers. The turnover tax rate in Kenya is three (3) per cent. No expenses are allowed to be deducted.
TOT was introduced in Kenya commencing on 1st January 2008. However, due to the prevailing political chaos at that time and numerous other extraneous factors, the uptake of the tax system has not been as initially envisaged.
TOT has been dogged by many problems. Under TOT, taxpayers are required to maintain minimal tax records and books. Tax returns and tax remittances are submitted quarterly in simplified formats.
During the budget speech, the CS proposed to do away with TOT and reintroduce the presumptive tax.
What is the Presumptive tax?
Presumptive tax is not a new method of paying tax in Kenya. To help us understand the meaning of the Presumptive tax, let us examine the meaning of the word presumption from which it is derived.
From the various definitions on the internet, the word presumption means “inferences that may be drawn upon the establishment of a basic fact”.
There are two types of presumptions:
a) Rebuttable presumption
These are inferences that must be drawn in the absence of conclusive evidence to the contrary.
b) Irrebuttable presumption
These are inferences that must be drawn no matter how much evidence exists to the contrary. Therefore, Presumptive tax is a method of tax that is based on available basic facts. The determination of TOT and taxes heavily depends on accounting records and books.
Relying on accounting records and books for tax compliance is tedious, costly, and complex, especially for small-scale business owners whose tax literacy is, in most cases, low.
Hence, under the presumptive tax, reliance is placed on basic facts, such as indirect methods other than accounting methods. The tax base is inferred from predetermined indicators that can be easily determined.
Benefits of Presumptive tax
From a taxpayer’s perspective, presumptive tax is expected to simplify compliance. Determining the amount of tax to pay, filing tax returns, and paying the tax authority are expected to be easier.
Tax procedures are simple, thus reducing the cost of tax compliance. The tax system is expected to have the same benefits as TOT and much more.
From the government’s perspective, the tax collection method is expected to broaden the tax base by netting more small and medium taxpayers, especially those in the informal sector, increase tax collection, and improve tax compliance.
The many taxpayers who have avoided tax for many days no longer have anywhere to go.
Challenges
From a taxpayer’s point of view, the frequent changes in methods of collecting income tax in Kenya are unsettling. It is hardly ten (10) years since TOT was introduced.
Also, the tax rate has been increased from three (3) per cent in TOT to fifteen (15) per cent in presumptive tax, though it will be based on the license fees. The taxpayers may end up paying more tax.
Already, there were complaints that the TOT rate was high, considering that the taxpayers were not deducting expenses. Besides, there are particular industries where markups are low, e.g., retail businesses where markups are about six (6) per cent. Additionally, the same problems (not political chaos) that affected taxpayers under TOT may be experienced by the taxpayers.
From the government’s perspective, the presumptive tax will be determined using indirect methods such as business permit or trading license fees.
In most cases, business licensing is based on the type of business, not turnover. Besides, where turnover is required, many taxpayers do not report their true turnover, so they do not pay the correct amount of tax. Most people who will be under presumptive tax do not maintain any business records.
Many people conduct business without a license from the county government. Therefore, the government will rely on taxpayers’ willingness and honesty to obtain business licenses and pay taxes.
How will the tax be levied?
The CS proposed that the Presumptive tax will be determined using indirect methods such as business permit or trading licenses fees. Based on this, the taxpayers will pay fifteen (15) per cent of the license fee as income tax.
Conclusion
It is still early to make any substantial conclusions about the operation of the proposed Presumptive tax in Kenya. The Finance Bill must be debated in Parliament and assented to by the President for it to become law as the Finance Act. Therefore, it is upon our parliamentarians to decide on the way forward.
This intervening period before the Bill becomes law presents a good opportunity for the citizens of this country to lobby their members of Parliament for any changes they want implemented.
Apart from the proposal for the tax change, the CS has not released any other information regarding implementation and commencement dates. We will keep you informed.
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Disclaimer
This post is for a general overview and guidance and does not in any way amount to professional advice. Hence, www.taxkenya.com, its owner, or associates do not take any responsibility for the results of any action taken on the basis of the information in this post or for any errors or omissions. Kenyan taxpayers must always rely on the most current information from KRA. The tax industry in Kenya is very dynamic.
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