Navigating tax obligations is a critical aspect of running a compliant and sustainable business in Kenya. For Small and Medium Enterprises (SMEs), understanding the differences between Turnover Tax (TOT) and Corporation Tax, including the applicable thresholds, filing procedures, deadlines, and exemptions, is essential for effective financial management.
Turnover Tax (TOT)
Turnover Tax is chargeable under Section 12 (C) of the Income Tax Act (CAP 470 Laws of Kenya). It is designed to simplify tax compliance for smaller businesses.
Applicability and Rate
A resident person whose gross turnover is, or is expected to be, more than Kshs. 1,000,000 but does not exceed, or is not expected to exceed, Kshs. 25,000,000 in any year of income is eligible to pay Turnover Tax.
TOT is payable at the rate of 1.5% on gross sales. Crucially, the law does not allow for deductions of business expenses against this gross sales figure.
Registration and Filing
- Registration: Registration for TOT is conducted online through the iTax platform at https://itax.kra.go.ke. The process involves logging into iTax, selecting the ‘amend PIN details’ option under the Registration module, confirming the intent to register for TOT, and selecting the date of registration before submitting the application.
- Due Date: A person subject to Turnover Tax is required to submit a return and pay the tax due to the Commissioner on or before the twentieth day of the month following the end of the tax period.
- Payment Procedure: After filing the excel return downloaded from the iTax portal, a payment slip is generated for settlement at a partner bank or through M-PESA.
- Record Keeping: Taxpayers under the TOT regime must keep records necessary for the determination and ascertainment of the tax in accordance with the Tax Procedures Act (Cap. 469A).
Exemptions and Elections
Turnover Tax shall not apply to rental income, management or professional or training fees, any income subject to withholding tax as a final tax, or non-resident taxpayers.
In exceptional circumstances, an eligible person may elect, by giving written notice to the Commissioner, not to be taxable under TOT. Upon making this election, the person will instead be subject to tax under the annual income tax regime.
Value Added Tax (VAT) Requirement
A TOT-registered taxpayer dealing in VAT-able supplies and generating a turnover of Kshs. 5,000,000 and above is additionally required to register for VAT.
Penalties
Failure to comply with TOT obligations attracts penalties:
- Late filing of a return incurs a penalty of Kshs. 1,000 per month.
- Late payment penalty is 5% of the tax due.
- Interest on unpaid tax is 1% of the tax due.
Benefits of TOT
The TOT regime offers several advantages, including simplified filing and payment processes, the option of payment through mobile phones via the M-Service App, reduced time spent on filing and paying taxes, and the fact that it is considered a final tax.
Corporation Tax
Corporation Tax is a tax chargeable on the profits of a company.
Applicability and Rate
Resident companies are taxed at a rate of 30%, and non-resident companies with a permanent establishment in Kenya are also taxed at a rate of 30%.
Individuals, sole proprietorships, and partnerships do not pay Corporation Tax. They are instead required to declare their total annual income in the Individual Income Tax Return and pay Income Tax.
Filing and Allowable Deductions
- Filing: Corporation Tax is filed online via the iTax platform using an Income Tax Company Return (IT2C Form). The return must be submitted on or before the sixth month following the end of an accounting period. For example, a company with an accounting period from January 1 to December 31 is allowed until June 30 of the following year to file its return. The return covers one fiscal year, which is a 12-month period chosen by the corporation for its financial statements.
- Taxable Income: Taxable income comprises the gross income earned or derived in Kenya after deducting expenses wholly and exclusively incurred in the production of that income. Sections 15 and 16 of the Income Tax Act specify the allowed and disallowed deductions, respectively. Deductible expenses may include general operational expenses, interest payable on loans used for working capital, salaries and wages, and administrative costs.
Exemptions
Certain income streams and entities are exempted from Corporation Tax. Notable exemptions that can be explored by SMEs include:
- The income of a public institution, body of persons, or irrevocable trust established solely for the purposes of the relief of poverty or distress, or for the advancement of religion or education.
- An Export Processing Zone (EPZ) enterprise that does not engage in commercial activities (such as trading, breaking bulk, grading, repacking, or relabelling of goods and industrial raw materials) is exempt from Corporation Tax for a period of ten years, starting from the year it was licensed. Although exempt from tax, such an enterprise is still required to submit an annual return of income. During this initial ten-year exemption period, the EPZ enterprise is still subject to withholding tax on payments made to it, tax on payments to non-residents (which is considered a final tax), and tax on employment income for employees and directors (excluding non-residents).
