Presumptive tax has simplified compliance for small enterprises

Richard Ngatia, chairman Nairobi chapter KNCCI. [Photo, Courtesy]

A largely transformative reform for the business environment took effect on January 1, potentially eliminating a major hurdle for small firms seeking bigger opportunities. The changes relate largely to the informal enterprises and seeks to increase their compliance to their respective tax obligations.

The implications of the introduction of presumptive tax as replacement for turnover tax is immense, and on several fronts. Besides being a minimal percentage of the amount payable in the prior arrangement, it has removed complexities associated with being tax-compliant which involve laborious accounting procedures and record keeping.

The National Treasury is now implementing the presumptive tax schedule which requires small businesses to remit levies to the Kenya Revenue Authority (KRA) alongside the annual single business permit issued by the county governments.

Counties are the designated tax collection agents on behalf of KRA, and discussions on the modalities of collection are underway. At the rate of 15 per cent of the single business permit fee, the budding enterprises will be playing their role in contributing to the national kitty while paving a path for their individual growth.

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If we take for instance a juice bar whose single business permit is Sh10,000, it is required to pay only Sh1,500 in addition as presumptive tax. Compared to the prior structure where such a business would remit three per cent of its annual turnover in taxes, the current order is a large saving for the trader.

Even for KRA, determining the accurate turnover, which the sales tax should be pegged on, is a near impossibility. Computing the annual turnover for informal businesses is in itself a challenge considering the unit sales are often in small amounts that would be difficult to track.

The same would be said of the thousands of informal carpentry workshops along our major roads, who ideally should be selling furniture to ministries and parastatals. In my understanding, better-informed middlemen would buy the furniture from the actual makers and sell to government, owing to a small advantage. Such traders have traceable and verifiable history in business owing to their past records of business permits and tax payment acknowledgements and compliance. Government procurement guidelines have it as a requirement that vendors must often demonstrate their experience and be a trader of good standing.

In the informal ways these small businesses operate, more often than not income is typically spent almost immediately to restock or purchase goods and services, thus calculating a single day’s revenues is a task in itself.

Generally, the informal traders are in business but are not be in a position to differentiate profit from revenue over a specific period, much less how much they have sold cumulatively. Hence, the realisation sales revenue is too complicated to use as a base for taxation makes the presumptive tax an ideal alternative.

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It should be viewed as the first step towards qualifying for participating in government procurement which runs into hundreds of billions annually. Government is the single largest purchaser in any economy, and this is specifically true for Kenya whose direct procurement annually is over Sh500 billion.

Major government-backed projects including the affordable housing championed by President Uhuru Kenyatta have brought opportunities to the doorsteps of small businesses. Wooden doors, ballast and building materials are just a few of the thousands of commodities that would be procured, with emphasis on 40 per cent local content.

However as indicated earlier, the local vendors must meet the basic requirements of being duly registered and tax-compliant entities. Beyond the newly-introduced affordable housing scheme, the State has always been a large buyer, procuring from an admittedly small pool of well informed suppliers.  

There is commitment from the State to procure as much as possible from local enterprises, more so those owned by disadvantaged groups; women, disabled and youth. Up to 30 per cent of the procurement has been set aside for these special groups who are hardly able to service just half of the intended quota.

Through affirmative action, several requirements have been waived for such firms but not the cardinal one of tax compliance. This in itself should make a strong case for the presumptive tax schedule, over any other arrangement.

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- The writer is the chairman of the Kenya National Chamber of Commerce and Industry, Nairobi County.

KRAKenya Revenue AuthorityNational Treasury