It has been as from time immemorial that we were required to “Render unto Ceaser”…a phrase that has become a widely quoted summary of the relationship between religion, secular government and society. So we take a look at the Tax regime in Kenya, particularly the taxes affecting the SME (Small & Medium Enterprises) sector. First and foremost, let us understand one basic principal… and understanding this principal is going to go a long way in defining tax moments later.
All the income of a person, whether resident or non-resident, which is accrued in, or derived from Kenya is subject to tax.
Which essentially means that as long as you are carrying out any business whereby you get an income… you are liable to pay tax. The reason why I want to highlight this here is because most of us as seen on the MOMBOSS platform do carry out businesses ONLINE and I will come back to the definition of this under the Kenyan Tax Law later in the article.
We need to understand a few definitions first:
Resident: When applied to an individual means he has
1.A permanent home in Kenya and was present in Kenya for any period in the year of income under consideration or
2. No permanent home in Kenya, but was present in Kenya for a period or periods amounting to 183 days or more in the year of income under consideration.
Non-Resident: A non-resident person can operate in Kenya through a registered Branch.
This in essence means, whether you are a Kenyan resident or a Non-Resident, and if you engage in any income generating activity, you are liable to pay Tax.
Section 3(2) of the Income Tax Act identifies the following sources of income that are subject to tax:
2. Dividends or interest;
3. A pension, charge or annuity; and any withdrawals from, or payments out of, a registered pension fund or a registered provident fund or a registered individual retirement fund; and any withdrawals from a registered home ownership savings plan; Section 3(2) of the Income Tax Act identifies the following sources of income that are subject to tax:
4. An amount deemed to be the income of any person under this Act or by rules made under this Act;
5.Gains accruing in the circumstances prescribed in, and computed in accordance with, the Eighth Schedule (Capital Gains Tax);
6. Subject to section 15(5A), the net gain derived on the disposal of an interest in a person, if the interest derives twenty per cent or more of its value, directly or indirectly, from immovable property in Kenya; and
7. A natural resource income.
What is VAT?
VAT is an indirect tax paid by the person who consumes taxable goods and taxable services supplied in Kenya and or imported into Kenya.
Tax is collected at designated points by VAT registered persons.
Any person supplying or who expects to supply taxable goods and services with a value of KES 5 Million or more in a year qualifies to register for VAT.
For those who are under the threshold, TOT or TURNOVER TAX applies.[AB1]
INPUT TAX – Refers to VAT charged on purchases of taxable goods and expenses for business purposes.
OUTPUT TAX – Refers to the VAT charged on the sales of Taxable goods or services.
Tax payable therefore is the difference between OUTPUT and INPUT tax.
Standard rate (16%).
Zero-rated in case of goods and services listed in the Second Schedule to the VAT Act.
8% in case of goods listed in Section B of Part 1 of the First Schedule to the VAT Act.
Exempted in case of goods listed Section A of Part 1 of the First Schedule and services listed in Part 2 of the First Schedule to the VAT Act.
Turnover tax is tax payable by small businesses whose gross sales do not exceed KSH 5 Million in a year.
The effective date for TOT was 1st January 2020 and the rate applicable is 3% of the gross sales per month which is to be submitted to the KRA on or before 20th of the following month.
There are benefits to Turnover Tax, which I feel are important to bring to light owing to the fact that most of our MOMBOSSES do have small businesses, some of the advantages being:
Taxpayers are required to keep records of gross sales only, no requirement to invest in Electronic tax registers.
Simplified filing and payment processes including payment through mobile phones. Reduced time for filing and paying taxes.
Tax rate of 3% is significantly lower to other rates of tax on income.
TOT is final tax and therefore a person is not required to file a monthly VAT return and the annual income tax returns.
Now, there is this other tax the government introduced on small businesses called PRESUMPTIVE TAX and this caused a lot of confusion amongst the taxpayers and I see the need for clarification.
PRESUMPTIVE TAX is the ADVANCE tax payable by small businesses whose gross sales do not exceed KSH 5 Million in a year, smells fishy doesn’t it? There is this TOT which is 3% on gross sales where the sales are below the 5M threshold and then there is this presumptive tax again. Note the word ADVANCE here.
The rate of the Presumptive Tax is 15% of the single business permit or trading license fee paid or liable to be paid to the county government annually.
This is paid at the time the business permit or license is required to be renewed. So when you go to the County Government offices to renew your business permit or licence you will pay the tax.
This now begs the question – what is the difference between the two taxes aside from the different rates and the fact that one is paid monthly while the other is annual? Isn’t this double taxation?
The answer is NO! Presumptive Tax is actually an Advance tax that will be deducted from the Turnover Tax payable in the subsequent months.
Earlier in the article I said I would revisit ONLINE businesses which is part and parcel of the MOMBOSS forum.
In the Finance Act 2019, the term “ONLINE BUSINESS” has been clearly defined as “A Digital Market is a place of direct interaction between buyers and sellers of goods and services through electronic means”. The amendment is aimed at clarifying that transactions in the DIGITAL ECONOMY are subject to tax. This is in line with the definition of income subject to tax as highlighted earlier in the article.
So there we have it Dear MOMBOSSES, The Kenya Revenue Authority is very much aware of the DIGITAL MARKETPLACE and they are keenly monitoring it. If you are actively trading and have a PIN Number, please ensure you comply with the Tax that is applicable to you. Remember, anything you post on any platform of the social media can be traced back to you easily and experience has it that it’s better to ‘Render to Caesar’ and sleep peacefully at night!
CPA Farheen Khandwalla( ACCA) is a certified public accountant with over 18 years of experience in Accountancy, Audit, Tax and Grants Management. A mother of 3 wonderful children, Farheen is currently working as a Business Process Outsourcing Manager for INNOVUS GROUP A Finance and Technology group with offices in Mombasa and Nairobi providing a wide variety of Financial, Tax, Audit & Assurance, business start up advisory as well as ICT services like ERP, Cloud Services, Mobile & Web Apps, Digital Marketing, Systems audits and reviews. Farheen is also a gender representative and a Tax subcommittee convenor for ICPAK(Institute of Certified Public Accountants of Kenya). For more information on Finance and Taxation services please email Farheen on email@example.com OR firstname.lastname@example.org