Presumptive tax is only payable by Kenyan businesses issued with single business permits by county governments. These enterprises should also have an annual turnover that is below Ksh 5 million.
Since the turn of 2019, taxation for small enterprises has changed. The finance bill 2018/19 opted to replace the turnover tax (TOT) used since 2008 with a presumptive tax model. This new system is designed to increase revenue collection from the informal sector.
The failure to meet revenue projections has cost the government billions every year. In fact, in the three month period ending September 2018, they missed their target by a whopping 60.46 billion. Tax revenue stood at Sh320.311 billion as opposed to their Sh380.76 billion target.
The idea of replacing TOT with presumptive tax was brought about by the high number of businesses in the informal sector that is not tax compliant. Ever since the Kenya Revenue Authority (KRA) posted a surplus of revenue collections by Sh4.1 billion in 2011, they have never met their target ever since.
How Will the Presumptive Tax System Work?
Presumptive tax is only payable by businesses issued with single business permits by county governments. These enterprises should also have an annual turnover that is below Ksh 5 million.
It is charged at a rate of 15% of the cost charged by the county government for the single business permit. Presumptive tax is a final tax and business owners are not required to declare it as they file their annual tax returns.
Eligible entrepreneurs will pay the tax upon payment of trade licenses and business permits. This tax does not apply to businesses engaged in rental, management or professional services.
How does presumptive Tax Compare to Turn over Tax?
Turn over tax is a taxation method introduced in 2008 to help small businesses become tax compliant. Just like the presumptive tax, it was designed for businesses with a turnover below 5 million per year. It is charged at a rate of 3% without deducting expenses. Under TOT, taxes are paid and filed on a quarterly basis in simplified formats.
Presumptive tax is however paid once annually. It is not charged in relation to the business’s total income but rather on a presumption of the income to be generated based on the business license fees. It is a tax method used in countries like India and has also previously been used in Kenya.
Turn over tax is being replaced as it has failed to achieve the intended results.
Benefits of Presumptive Tax to Business owners
TOT was introduced a little over a decade ago to make payment of tax easier for small businesses. The presumptive tax takes that simplification up a notch.
- Taxes are only paid once in a year
- Determining the total taxable amount is easier as records of sales and transactions are not required
- The simple process allows businesses of all sizes to be tax compliant.
Under the TOT model, some businesses were adversely affected. This is because there are certain sectors where profit margins are below 10%. For such businesses, paying 3% of their total revenue even before deducting expenses is very expensive.
Benefits of Presumptive tax to the government
The government will enjoy an increased tax base and higher compliance levels. This is because calculating, paying and filing of taxes will be simple. This will encourage even small businesses to become compliant.
With a wider tax base and higher compliance levels, the government will be able to collect more taxes that can be channeled to development projects. This will also help reduce the governments need to borrow to fill budget deficits.
By partnering with county governments, the Kenya Revenue Authority (KRA) will be able to know all the businesses eligible to pay presumptive tax. They will also be able to make tax projections for subsequent years for each county based on the number of projected startups added to existing businesses.
Is Presumptive tax Cheaper or more expensive than Turn over Tax?
By looking at just the percentage charged, it would appear that presumptive tax is more expensive. On the contrary, it is significantly cheaper.
Let’s look at a hypothetical example of a typical barber shop owner.
A barber shop license in a county like Kiambu ranges from Sh6,000 to 12,000. The revenue generates from most barbershops ranges from Sh800 to 5,000 depending on the size. With a daily revenue of 1,000, the barbershop owner will be liable for the following tax amounts under the different models.
Turn over Tax
TOT is charged at 3% of revenue. Daily income of sh1,000 will translate to annual revenue of 364,000. At 3%, TOT tax due will be Sh10,920.
If the barber shop owner pays a trade license fee of 12,000, he will have to pay a presumptive tax of 15% of that amount which will translate to 1,800.
From the above example, you can clearly see that despite being easy to calculate, the presumptive tax is significantly lower than TOT.
The presumptive tax has benefits for both small business owners and the government. If it is properly regulated and monitored, it has the potential of transforming Kenya. The Kenyan government will have more funds to achieve its development objectives. This will then create a conducive environment for industry and businesses that will also contribute to the revenue pie.