Tax Planning for SMES in Kenya

  

Date Posted: 11/5/2012 10:17:11 AM

Posted By: moff J  Membership Level: Silver  Total Points: 485

---

The Kenyan government is grappling with a bulging budget, most of which is recurrent expenditure. This is pushing the government to the limit and as such it has to come up with new techniques of meeting its expenditures. Taxes are without a doubt the largest source of revenue for the government. The agency charged with the responsibility of collecting taxes for the government (Kenya Revenue Authority, KRA) is therefore becoming very aggressive in its tax collection measures and is coming up with ways of widening the tax bracket so as to meet its target. Among the most recent step by the government was to introduce tax on rental income and the KRA is also targeting “athletes’ dollars”. The small and medium size enterprises (SMEs) are also being targeted to ensure that they comply with tax requirements.
The good thing is that there are some provisions in the law that the individuals, SMEs, and even large corporations, can take advantage of to comply fully with the law and at the same time minimize their tax liabilities: this is what is known as tax planning which refers to the organization of a taxpayers affairs so as to reduce the tax liability legally.
This article is meant to educate the taxpayer, specifically the small and medium enterprises (SMEs), on the measures they can take to comply with the Income Tax Act and at the same time reduce the tax payable.

Have you heard of TURNOVER TAX? No? Continue reading then…
Turnover tax is tax charged on businesses whose total sales exceeds Shs.500,000 per annum but is less than Shs.5,000,000 per annum. Many SMEs fall in this bracket.
The striking thing about this tax charge is that it is charged at a low rate of 3% and it is final tax, meaning that once you have paid

it you are not supposed to pay any income taxes on this income!! Compare this to a case whereby for instance your SME is a sole proprietorship. This implies that income arising from the business should be assessed on you and added to your employment income (if any) so as to determine the total taxable income. Personal income tax is charged on a graduated scale with the lowest rate being 10% for an annual taxable income amount of up to Shs.121,968. The tax rate increases gradually as ones income increases.

Let us take a practical example: Assume you have a business whose annual sales total Shs.500,000 and the allowable business expenses amount to Shs.263,120. (These are hypothetical figures)

Option A): you have registered for turnover tax. This implies that the tax payable will be equal to :
3% of 500000= Shs. 15000
Note: YOU ARE NOT ALLOWED TO DEDUCT ANY EXPENSES.

Option B): you have not registered for turnover tax and therefore the tax will be assessed on you and tax charged on the graduated tax rates:
Here, the taxpayer is allowed to deduct expenses which are incurred in the generation of the income such as water, insurance, electricity, selling and distribution expenses, among others.

The taxable income will be: 500,000-263120= 236880.
To compute the tax payable:
Annual taxable pay Rate Tax Payable
1 - 121968 10% 121968*10%=12196.8
121968 - 236880 15% 114912*15%=17236.8

Total Tax Payable: 12196.8+17236.8= Shs.29433.6

It is therefore clear that the turnover tax is lower. However, if the business has a lot of allowable expenses which are likely to decrease its profitability, then it is possible that the taxpayer pays a lower tax even if he is not registered for turnover tax. The business will however at some other future time make huge profits and you might end up paying very high taxes when the business makes those high profits. Therefore, for consistency and cost-effectiveness, turnover tax carries the day.

SMEs open your eyes!! The next time KRA comes knocking on your business premises let them find that you are already registered for turnover tax rather than playing hide and seek with them and then once they catch you, you are slammed with punitive interests and penalties.
This tax was actually introduced with the SMEs in mind so as to encourage their growth and at the same time boost government revenues.

---

Next: Let us appreciate the itinerant traders of Kenya i.e. Hawkers, peddlers
Previous: The History and Causes of Police-induced False Confessions