Kenya relies heavily on agriculture and farmers generate taxable income. The farmers like any other person who has taxable income are expected to pay income tax. Failure to pay the correct amount of tax and to pay the tax when due attracts fines, penalties, and interest.
How does a farmer pay income tax?
Income tax on farming income is paid to the government using any of the following two methods:
- Turnover Tax
- Normal Income Tax
A farmer can choose whether to pay income tax as Turnover tax or under the normal Income tax regime as long as the annual turnover is less than the applicable Turnover tax threshold. When a farmer has an annual turnover of more than the Turnover tax threshold, Income tax law requires that they pay income tax under the normal income tax.
The following is an explanation of the two Methods that any farmer can use to pay income tax.
Turnover Tax
Turnover tax is the tax on a taxpayer’s annual turnover. This is not a tax but a method of paying income tax by small and medium taxpayers. Turnover tax is paid by persons whose annual income is less than the Turnover tax threshold for twelve months. Turnover tax is paid every month on the sales without taking into account the business expenses.
The Turnover tax rate is not constant. When Turnover tax was introduced, the rate was 3%, then it was reduced to a more manageable rate of 1%. There are proposals to increase the rate to 3%. Check the current rate.
Example:
Ms. Kadija sells her milk at the rate of kshs 60 per litre and produces 40 litres every day for sale. Assuming one month is 30 days, her sales were:
Kshs 60 x 40ltrs x 30 = kshs 72,000.
Assuming the Turnover tax rate is 1%, the Turnover tax amount is 1% x kshs 72,000 = kshs 720.
Ms. Kadija will remit kshs 720 as Turnover tax to KRA.
Normal Income Tax
Any farmer whose annual turnover is less than the minimum than the Turnover tax threshold has an option to pay income tax under the normal income tax regime instead of under Turnover tax. However, the farmer must get permission from the tax Commissioner.
Farmers with turnovers more than the Turnover tax threshold pay income tax using normal income tax system and have no other option.
Under the normal income tax regime, taxpayers deduct all deductible expenditures that are incurred towards the generation of the taxable income. Also, the taxpayers are required to pay tax on an instalment basis.
Instalment Tax
It is mandatory for all non-individual farmers to pay tax on instalment basis. However, for individual farmer, only those paying more than kshs 40,000 income tax per year of income pare required to pay income tax on instalment basis.
The instalments are estimated amounts that may be based on the actual taxable income for the period at 110% on the prior year’s tax. Currently, income tax is paid at the rate of 25% of annual taxable turnover.
Farmer pay instalment tax two times a year. 1st, 2nd and 3rd instalments are paid by the 20th day of 9th months. The 4th instalment is paid by the 20th day of the 12th month.
In case there is a balance of tax established by the individual farmer or after the annual audit by non-individual farmer, the farmer will be required to pay the balance by the last day of the 4th month after the closure of the year of income year.
Example
Abed, a chicken farmer had an annual turnover of kshs 10million in 2018 and had paid total tax amount kshs 1million in 2018. Abed is an individual taxpayer and his year end is 31st December. Assuming his instalment estimation method is prior year basis, what tax amounts did he pay in 2019 for each instalment?
Answer
The total amount of income tax that Abed paid in 2029 was as follows:
Tax for 2019 based on 2018 tax – 110/100 x kshs 1million = kshs 1,100,000.
For each instalment, Abed should have paid kshs 1,100,000/ 4 = kshs 275,000.
1st instalment payment (20th day of the 9th month) (1st, 2nd & 3rd instalment) = kshs 825,000
2nd instalment payment (20th day of the 12th month) = kshs 275,000
In case Abed had any balance of tax, he should have paid it by the 30th of fourth month that is April 2020.
For any clarifications on the taxation of farming income, contact us HERE
