Last week, a close friend sought to understand what Minimum Tax is, and I explained it to them. A few days later, they informed me that they had researched further and discovered that Minimum Tax is also Turnover Tax. I was alarmed and responded with an emphatic No!
Nevertheless, I understood where they were coming from. Minimum Tax is computed by summing up the gross turnover for each quarter (3 months), with 1% of this amount being the Minimum Tax payable. For details, see Demystifying Minimum Tax. In light of this, one may be pardoned for thinking that Minimum Tax is Turnover Tax.
It is important to understand the difference between the two taxes, and to identify which of the two is best suited for one’s enterprise. Below is a summary of what Turnover Tax is.
The definition and application of Turnover Tax has been subject to numerous changes over the last few years. The current position is vide the Finance Act No. 23 of 2019 as amended by the Tax Laws Amendment Act No. 2 of 2020. The effective date was January 1, 2020.
Turnover Tax is payable by a resident person whose turnover is between Kshs. 1 – 50 Million par annum. Persons excluded from this tax obligation are those earning:
- rental income;
- management or professional or training fees; or
- any income which is subject to a final withholding tax under this Act.
Before the 2020 amendments, this tax was limited to persons receiving a turnover of Kshs. 5 Million and below, and excluded limited companies. It was targeting micro and small enterprises, the informal sector and jua kali industries. However, the current provisions are highly inclusive since they loop in majority of the small and medium sized enterprises trading in goods. Most of the enterprises in the service sector would be disqualified since they earn management/professional/training fees.
Rental income is a specified source of income with exclusive provisions dealing with its taxation, and is understandably ineligible for Turnover Tax. Employment income also falls outside the ambit of this tax, since it is subject to the Pay-as-you-Earn system (PAYE).
From the wording of the Act, all persons who qualify for Turnover Tax should adopt it as the default system of computing and remitting their tax. Those who wish to use alternative systems should, by notice in writing addressed to the Commissioner, elect otherwise.
Now that we have established which parties are subject to Turnover Tax, how is it computed?
The taxable person should sum up their gross receipts/turnover for each month, and 3% of this amount is the Turnover Tax. A return should be filed and the tax paid by the twentieth day of the following month. For example, tax payable on January’s gross receipts should be paid by February 20th. Kenya Revenue Authority (KRA) literature indicates that it is a final tax.
The market is abuzz with discussions on Minimum Tax which came into effect on January 1, 2021. It is our hope that we shall not lose sight of the provisions on Turnover Tax, as our enterprises chart the course for year 2021. Stability in the definition and applicability of this tax will also go a long way in ensuring compliance by taxpayers.
From Par Excellence Concepts LLP, may the new year bring good tidings and abundance, sufficient for ourselves and the taxman!