Turnover Tax:

That Kenya is an entrepreneurial nation is no secret. This is evidenced by the large number of businesses, both registered and unregistered.  Whether this huge number of businesses contribute to the national kitty is a debatable matter all together.

Of particular concern is the micro, small and medium enterprises. Everyone wants to get into business. From bar talks, chama meetings to family gatherings, the discussions are on the current most profitable venture someone can get into – the side hustle. No wonder most con artists and scammers find Kenyans an easy target since everyone is looking to make an extra coin at the least possible cost.

When you have at tete-a-tete with those in employment, either one is contemplating resigning to start a business or they have a side-hustle to which they keep rushing out of their desks to attend to. At times it is the ‘makanga’ calling you just when you are about to make a presentation to the board telling you that they are in police custody for overlapping!

.Then we have the start-up kids, the millennial generation that is impatient and in need of quick cash. The average length of employment for the millennial is so short that HR departments are fully engaged in processing the millennials in and out. They want to be their own bosses, control their time, and money too. As a result we have many young people starting businesses after college. These and other factors have led to the mushrooming of micro and small enterprises

According to the 2016 Micro, Small and Medium Enterprises Survey by Kenya National Bureau of Statistics (KNBS) there were about 1.6 million licensed and 5.9 million unlicensed businesses falling under the Micro Small & Medium Enterprises (MSME) category.

93.8 per cent of the unlicensed businesses reported a monthly turnover of less than KSh 50,000 and none had a turnover above KSh 1,000,000. Distribution of licensed businesses by turnover indicated that almost a half of these establishments had monthly turnover of less than KSh 50,000. Licensed establishments with a monthly turnover between KSh 50,000 to KSh 200,000 constituted 31.3 per cent. More than half of the licensed medium establishments recorded a turnover of more than KSh 1,000,000.

This growth in the MSME sector is a revenue potential for the taxman and hence the introduction of the Turnover Tax (TOT) to cater for this level of business.

Despite having the infrastructure in place, the KRA has not pursued this line of income with gusto like it does with the big boys. It’s worthwhile to note that while the big boys with the big bucks are expected to pay huge taxes, most of them are either in losses, which they can claim later when they get back to profitability or they hire the services of professional tax advisors for advice on reduction of their tax liability.

One of the limiting factors for the KRA in collecting turnover tax is the efficiency in administering the tax. An efficient tax system should ensure that the administrative burden of complying with the tax law is at its minimum. The system should produce the highest possible yield at the lowest possible cost both to the tax authorities and the tax payer. It should also ensure that the greatest possible proportion of taxes collected accrue to the government as revenue. Dealing with the large number of small businesses whose turnover qualifies but have not been paying tax is a nightmare to KRA.

TOT was introduced by the Finance Act 2007 and targeted businesses with an annual turnover between five hundred thousand and five million shillings.

This means at a minimum any business with an average turnover of KShs 2,000 per day qualifies for TOT. From your local butcher to your barber most of them definitely make turnovers of above KShs 2,000 per day. Do they pay tax? It is unlikely since the only levy they fear is “kanjo” with whom they play cat and mouse games all day.

Should KRA strongly enforce TOT, then the side hustles will pay their fair share of tax in line with KRA’s mantra “tulipe ushuru tujitegemee”

Interest income and dividends are exempt from TOT together with rental income, professional and management fee incomes. Companies are also exempted from TOT since they pay corporation tax.

The TOT rate of tax is 3% of the gross sales per annum. Taxpayers under TOT are expected to file their returns every three months (quarterly) on the i-Tax platform using the TOT 3 return. Payments and the tax returns are due by the 20th day of the month immediately following the end of the quarter.

Failure to submit a return immediately crystallizes a penalty of KShs 5,000 according to Section 83(1)(b) of the Tax Procedures Act 2015. A further interest of 1% per month is charged on the outstanding tax.

The efficiency challenge is not the only deterrent to compliance with TOT. Taxpayers are generally not aware of their tax responsibilities. Most of them end their compliance by opening i-tax accounts by cyber attendants who have no clue as to the liabilities applicable to the taxpayer.

KRA needs to increase trainings and awareness of the tax obligations among the target groups.

We acknowledge that KRA has made strides in addressing the cost of collection through strengthening of the i-tax platform. This has made filing and interactions with the KRA easier.

To address the efficiency question in regards to turnover tax, I would like to propose KRA to consider outsourcing the collection of the turnover tax.

This entails appointing agents who collect the tax on behalf of KRA and in return receive some form of commission. This will relieve the authority of the staffing question which has dogged it for a while now. As currently constituted it will be an uphill task for KRA to look into the MSMEs since they are still struggling ensuring to enforce compliance among the large and medium tax payers.

Outsourcing will greatly increase the turnover tax since the agents will be motivated by personal interest to collect. The agents will have a personal interest in the collection of the tax unlike the revenue collector’s employees who do not have a personal stake in the taxes collected.

Further, this will go a long way in reducing the cost of administration for the turnover tax leading to tax efficiency. The collection agents will endeavor to be professional so as to collect the maximum tax possible and also merit for renewal of their license.

Outsourcing of the collection of TOT on the other hand would pose several challenges as evidenced by a trial of this system in some local authorities in Tanzania.

The local authorities engaged private tax collectors, cooperative societies and trade associations that the businessmen were in to collect the taxes.

The agents were vetted by the authorities and trained. Their remuneration was the commission received on the amount of tax collected. This saw a great leap in the amount of tax collected and enhanced efficiency as the authority’s core staff now concentrated on other matters.

In a report by Research On Poverty Alleviation (REPOA) of Tanzania, some of the challenges that face the outsourcing program include overzealous agents who may collect the taxes using unprofessional means. This can be managed by carefully selecting the agents and using the traders associations to collect the tax from their members.

Outsourcing may also be a breeding ground for corruption. Unscrupulous agents may solicit bribes from the tax payers in order not to collect the turnover tax from them. In this regard the taxman should carefully select the agents and come up with a water tight program of accountability and agent management.

The other fear with outsourcing collection of TOT is confidentiality with businesses fearing that competitors may easily obtain their information and use it to sabotage them. For this system to work, the agents must be committed to binding contract to ensure that they remain professional. Should any agent breach the trust bestowed on them, the penalties should be severe.

The success of such a venture would require drastic reforms in policy and the legal framework. Tax payers rights should be strengthened more to shield them from any adverse effects of such a system.

In the end the benefits outweigh the challenges and hence it is time that KRA stepped into this uncharted path in search of increased revenues.

 

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  • Andersen Tax has found a home in Kenya and provides a wide range of tax, valuation, financial advisory and related consulting services to individual and commercial clients.

  • Andersen Tax has found a home in Kenya and provides a wide range of tax, valuation, financial advisory and related consulting services to individual and commercial clients.

  • A tax return is a form or forms filed with a tax authority that reports income, expenses, and other pertinent tax information. Tax returns allow taxpayers to calculate their tax liability, schedule tax payments, or request refunds for the overpayment of taxes.