Turnover Tax will expand the tax-base, and ease the tax burden

By Elizabeth Meyo

Thursday 20th February 2020, made history as Kenya joined other African countries in successfully taxing the informal sector through the first collection of Turnover Tax (TOT).

The TOT was re-introduced in January, bringing the informal sector into the tax bracket, a move that is expected to widen the tax bands and ensure equitable distribution of the tax burden.  

Turnover Tax (TOT) is payable by any resident person whose turnover from business does not exceed or is not expected to exceed Ksh. 5,000,000 during any year of income.

Turnover tax is currently working perfectly in countries like Ghana, Tanzania, Zimbabwe, South Africa and Nigeria. Other countries in Africa have now joined hands just like Kenya, to mobilize tax resources to boost growth and prosperity.

The African Tax Administration Forum (ATAF) is also actively leading countries in discussions around the growing interest, in taxation of the informal sector.

Currently, only 8% of the over, 40 million Kenyans diligently remit taxes; majority of this population are in the employment bracket.

A recent report by the United Nations’ Economic Commission for Africa states that Kenya has the highest informal sector employment at 77.9%, among nine countries, which include Rwanda, Uganda, Tanzania, Egypt, Liberia Mauritius, South Africa and Madagascar.

The huge number of informal sector workers receive steady income from businesses but do not remit their share of taxes as required.

The turnover tax is in line with the Finance Act, 2019, compelling businesses whose income does not exceed KSh. 5 Million to pay 3% on gross receipts, payable monthly.

For example, if an individual’s gross receipts for the month of January 2020 accrues to Ksh. 100,000, is liable to pay ToT at 3%, which is KSh. 3,000. This amount is payable on or before the 20th day of the following month (February, in this case).

On the other hand, an individual who pays Single Business Permit of KSh. 1, 000, pays 15% of this, which is KSh. 150. This is advance tax, which is available, to reduce the taxpayer’s liability for the month. To illustrate this, the 3% TOT paid from KSh. 10, 000 turnover is KSh. 300, but because Presumptive Tax of KSh. 150, is applicable in this case, it is deducted from the KSh. 300, making the payable TOT amount to only KSh. 150.

In collection of this tax, KRA targets all businesses or persons applying for licences in the counties. In doing this, the tax base is being expanded to include the rest of the taxpayers who do not pay taxes.

Given the dwindling tax revenues generated from the small formal sector, tax experts and economists worldwide have called on countries to consider taxing informal sector enterprises.

Kenya is therefore moving towards the right direction, with the re-introduction of TOT, despite the outcry from taxpayers.

It is important to note that taxation is the key source of revenue that the government of Kenya uses to provide public services to its citizenry. It is equally important that Kenyans embrace this move to expand the tax base and ensure that all taxpayers pay their equitable share of taxes.

Authors (Barnett and Grown, 2004) in The Politics of Private Foreign Aid, insinuate that majority of developing countries, are dependent on foreign aid as an external source of revenue. Kenya is amongst the countries that is trying to get out of foreign aid dependency through a self-sustainable economy, where policies support revenue collection.

The Kenya Revenue Authority (KRA) is keen on the successful collection of this tax, hence the use of technology such as iTax, Mservice and the USSD, to ensure maximum collection of TOT. This in essence, means that every Kenyan who consumes a service from businesses in the TOT bracket will remit the required 3% via their mobile phones, to a KRA till number. 

The mobile payment platform eases payments through banks appointed by the Commissioner of Domestic Taxes department (DTD), which include National Bank of Kenya, Kenya Commercial Bank and Co-operative Bank of Kenya.

Taxpayers have a choice to pay TOT by cash, cheques or electronic funds transfers. ToT taxpayers are advised to register as KRA online services users to enable them access the KRA online services portal www.kra.go.ke/portal.

The use of mobile telephony to tap into the informal sector is one sure way of maximising collection of TOT.

The design and performance of Kenya’s tax system has implications for inequality, it is therefore the role of the government through laid down policies to pursue a fair tax system for equitable distribution of income and welfare of the citizens.

Turnover tax is one way of ensuring a fair tax system that does not lock out the informal sector from contributing to building the economy.

Since re-introduction of TOT, taxpayers have decried that it will cripple businesses; nonetheless, this is far-fetched since only 3% of the gross turnover is paid to government and the balance of 97% remains with the business owner.

The modalities of collection of TOT are well thought out. KRA for instance has a cordial working relationship with county governments, who remit a list of all names of persons and businesses that have applied for licences.

KRA targets all businesses or persons applying for licences in the counties. ToT aims at enhancing the tax base and ensuring that all taxpayers remit their equitable share of taxes to help the government fulfil the Big 4 agenda.

Taxpayers therefore need to have goodwill in adhering to the set guidelines in remission of TOT, given that the informal sector is a key economic hub in many parts of the world.

The writer is the Commissioner for Domestic Taxes Department at Kenya Revenue Authority

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