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How presumptive tax will affect small businesses

Grace Muchiri

The Income Tax Act is to be repealed to make the law comply with and also to increase revenue to government. The Treasury Cabinet secretary indicated that the Income Tax Bill is aligned to international best practice and it also addresses the current business environment.

It is noteworthy that, among other changes, the new law seeks to introduce Presumptive Tax in Kenya to tax residents whose business turnover is less than Sh5 million a year. The said law mainly targets sole proprietors and businesses that are not incorporated.

The tax will be collected when one is issued or is renewing business permits with the respective county governments. The proposed law states that presumptive tax shall be 15 per cent of the single business permit fee issued.

Management and professional services, rental business and income of incorporated companies are, however, exempted from Presumptive It will be interesting to see if one will be required to pay the tax directly to the Kenya Revenue Authority (KRA) or to the County government as an agent of KRA.

It is likely that the small “jua kali” businesses, that include kiosks, salons and local barber as well as the small canteens where Kenyans go for their lunch will be liable to pay tax in order to obtain their business permits or renewals of the same.

The question that begs is, for one be able to pay presumptive tax, will he be required to have a personal identification number (PIN)? If it becomes a requirement, then some small traders who may have never had a PIN may now be required to obtain one.

A PIN comes with the requirement to file annual tax returns failure to which penalties and interest are automatically charged through the iTax system. Presumptive tax may lead to increased cost of doing business and this cost is likely to be passed down to the consumer. In essence therefore, the cost of living for Wanjiku is likely to go up.

The proposed law will replace turnover tax that is currently chargeable on persons whose business income does not exceed Sh5 million. The government has been struggling with the implementation of turnover tax as it is based on self-declaration and it has been a challenge to bring this group of taxpayers under the ambit of tax.

It is, however, paramount for KRA to ensure that they put in place an administration and collection framework that is simple to ensure that collection costs do not exceed amounts collected. This is also in light of the fact that the tax in question will affect a significant number of tax payers.

In Uganda and Tanzania, the tax laws provide designated bands indicating how much Presumptive Tax is payable according to how much income one earns. Kenya could consider this approach in order to enhance equity.

It is clear that by introducing Presumptive tax, the government’s overall. It is, however, also important for the government to consider the overall impact this will have on Kenyans making less than a dollar a day.  – The writer is a senior tax consultant with Ernst & Young

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