Taxes affecting small business owners

Japheth Nyamuhanga who buys sleepers' at wholesale at a Isebania border-shop. [Caleb Kingwara, Standard]

Global tax industry practice shows that all and any taxes fall into about three categories based on what you earn, buy and own.

In the case of corporate income taxes, small businesses should expect to be levied accordingly on business profits – which are revenues (what a business makes in sales) minus costs (the cost of doing business).

The same goes for payroll taxes which are levies paid on the wages and salaries of employees.

On earnings, small enterprises anywhere should expect to be dealing with individual income taxes, corporate income taxes, payroll taxes, and capital gains taxes.

Buying has sales taxes, gross receipts taxes, value-added taxes, and excise taxes are common while ownership entails property taxes, tangible personal property taxes, estate and inheritance taxes, and wealth taxes.

Locally, the Kenya Revenue Authority (KRA) has more to say on these taxes, Enterprise looks at the must pay taxes.

The beginning of this year saw KRA introduce the Minimum Tax, Digital Services Tax and the Voluntary Tax Disclosure Programme (VTDP) where taxpayers will get relief on penalties and interests on undisclosed taxes dating back to July 2015.

The Digital Service Tax (DST)

The Digital Service Tax (DST) is a tax that is payable on income derived or accrued in Kenya from services offered through a digital marketplace, notes KRA.

DST is payable at 1.5 per cent of the gross transaction value and is due at the time of transfer of the payment for the service to the service provider, adds the taxman.

This is a key tax to note, especially if one is interested in starting an online business.

Delving into the salient features of the tax effected in January this year, independent tax advisory RSM reveals that what is taxable in the context of a digital marketplace include downloadable digital content such as mobile applications, e-books and films; subscription-based media including news, magazines and journals; over-the-top services including streaming television shows, films, music, podcasts and any form of digital content.

Others are software programmes, including drivers, website filters and firewalls; electronic data management including website hosting, online data warehousing, file-sharing and cloud storage services; music and games; distance teaching through pre-recorded media or e-learning including online courses and training; digital content for listening, viewing or playing on any audiovisual or digital media, among others.

Minimum tax on turnover

Kenya’s Finance Act 2020 also introduced the controversial minimum tax effective January this year.

“The minimum tax is intended for taxpayers who are carrying out businesses and thus earning revenue, but their tax payable is lower than one percent of their gross turnover,” says tax firm PWC.

“The minimum tax will be a final tax and is payable in instalments that are due on the same date as the current instalment tax obligations.”

However, in April, the High Court issued a temporary order suspending the implementation of the new minimum tax pending the full hearing of court cases filed by certain taxpayers.

“Should the Kenya Revenue Authority win the case, the minimum tax will be due on a retrospective basis,” observed PWC.

Turnover Tax (TOT)

Turnover Tax (TOT) or Presumptive Income Tax was one of the most controversial taxes on small businesses proposed by KRA to start in January 2020.

Under this, small businesses are taxes on their gross sales.

Any business whose gross turnover is above Sh1 million and doesn’t exceed Sh50 million annually should pay this tax. The small businesses that are exempt, however, are still required to declare and file their corporate tax returns.

When it comes to the penalty for noncompliance, the taxman has spelt out that as of April last year, TOT late filing attracts a maximum penalty of Sh1,000 per month as late payment penalty is five per cent of the tax due, while interest on unpaid tax attracts one per cent of the principal tax due.

Also hard to ignore here for some small businesses are property taxes such as rental income and capital gains taxes (CGT). “CGT is tax that is levied on transfer of property situated in Kenya, acquired on or before January 2015. It is declared and paid by the transfer of the property,” adds KRA. 

Value Added Tax (VAT)

A typical small business closely interacts with valued added tax (VAT), which, according to KRA, is an indirect tax that is paid by the person who consumes taxable goods and taxable services supplied in Kenya and/or imported into Kenya.

“Any person supplying or who expects to supply taxable goods and taxable services with a value of Sh5 million or more in a year is required to register for VAT. The law provides for voluntary registration where the threshold is below the stipulated amount,” says KRA.

Some other take-homes for small businesses on VAT are the three rates of the tax, where the general rate (14 per cent) is applicable to all taxable goods and services other than zero-rated supplies, eight percent is intended for petroleum and petroleum products.

The zero rate, however, is applicable to certain categories of supplies meant for the promotion of trade, exports, agriculture, education and health.

Touching on some advantages, KRA says as no tax is chargeable while input tax can be claimed, zero-rating makes the supplies cheaper.

“Registered taxpayers who sell zero-rated supplies are entitled to a refund of input tax paid...Exempt supplies are not taxable and any related input tax is therefore not deductible. These supplies are listed in the first schedule of the VAT Act 2013.”

It is also incumbent on small businesses here to be in touch with requirements of other ubiquitous taxes such as excise duty - a tax imposed on goods and services manufactured in Kenya or imported into Kenya as specified in the first schedule of the Excise Duty Act (2015).

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