Finance Act: Why Presumptive Tax will Fail and Other News


By gatuyu t.j

Presumptive Tax: The Finance Act has scrapped the turnover tax and replaced it with the presumptive tax.

The scrapped turnover tax, introduced in the year 2008, was charged on persons who did not meet the VAT threshold to register for Value Added Tax (turnover of below KES 5Million).

However, it was optional, to the extent that eligible taxpayer was at liberty to opt out by writing to the commissioner and pay taxes in ordinary manner on business income. It was charged at a gross rate of 3%, with no expenses allowed. Turnover tax failed, hence the replacement.

The new presumptive tax takes the fashion of turnover taxes. By way of a primer, presumptive taxation is the use of indirect methods to determine tax liability. The method is not based on taxpayer’s accounts and taxable amount is inferred. It targets those not covered under usual tax coverage and at the same time have taxable capacity, such as the Jua Kali sector.

The introduced presumptive tax in Kenya will apply to persons issued or liable to be issued with a business permit or trade license by a county government. It is payable by to a resident person whose turnover from business does not exceed five million shillings during a year of income.

Any person with a turnover exceeding 5 million on taxable supplies is expected to register and charge value added tax and compute business income tax. However, it does not apply to income derived from management and professional services; or rental business; or incorporated companies.

Issuance of business permits, on which this tax is pegged, is a function of the county as demarcated under Part II of Schedule Four to the Kenyan Constitution. Most of the county governments have already enacted county legislation on trade licensing which issue guide on issuance of trade permits.

The third schedule to the ITA has been amended to provide the rate chargeable on presumptive tax to be an amount equal to 15% of the amount payable for a business permit or trade licence issued by a County Government, and it is the final tax. This means the amount chargeable tax is gross and no expenses are allowed. The turnover tax failed when the rate was 3%; how will this new tax have compliance when the rate is 15%?

However, just like it was for turnover tax, and just like other taxes such as residential rental income tax, a taxpayer is at liberty to opt out by making a notice in writing to the commissioner. By opting out, they would be expected to compute their taxes from business income from the normal way.

The due date for payment of presumptive tax is at the time of payment for the business permit or trade license or renewal of the same. This is an odd provision, with unhealthy assumptions. As explained, issuance of trade permits is a mandate of the county governments.

There is nothing that compels county governments to issue permits that are in line with ordinary fiscal year, whereas a year of income for purpose of taxes is usually a period of 12 months. Some counties may elect to have business permits that lasts more than a year.

Further, tying the tax payable with amount equal to trade permit may lead to revenue leakages. A county may opt to forgo permit fees, and issue permits at peppercorn, for whatever reasons, including encouraging setting business activities.

Again, it presents a retrogressive and unequitable tax. Most of the business permits are issued at standard amount, but are incomes from business standard? A mama mboga with a turnover of KES 95K and a big shopkeeper with a turnover of KES 4 Million will pay tax on the same amount?

It is as simple as that. Presumptive tax will fail, in a big way, just like turnover tax.

News Round up on Income Tax provisions

One, A 30% of the electricity cost of electricity cost, incurred by manufacturers in addition to the normal electricity expense, will be an allowable deduction under Section 15 of the ITA, subject to conditions imposed by the ministry.

Second, In taxation of insurance companies, capital gains tax would be charged on any gains arising from the transfer of property by an insurance company. However, property connected to life insurance business is excluded.

Third, Demurrage charges and insurance premium (except insurance premium paid for insurance of aircraft) will be treated as incomes and will be subject to withholding tax.

A Demurrage charge has been defined as the penalty paid for exceeding the period allowed for taking delivery of goods, or returning of any equipment used for transportation of goods.

Visibly, it is targeted towards ship operators who delay before clearing goods from the warehouses or ports. The rate of withholding tax payable, in case of demurrage charges paid to ship operators, is 20% of the gross amount. In case of an insurance premium, it is five per cent of the gross amount payable.

Lastly, where a company is conducting business jointly with government, in a special operating framework arrangement, hear this; it will not pay taxes at the normal rate. Instead, tax will be payable at the rate provided in the agreement. This was a terrible, terrible, provision.

Companies such as Lake Turkana Wind Power, those engaged in private public partnership, will naturally negotiate to pay taxes at a lower or at zero taxes in those framework agreements. To follow will be the multiple Chinese companies doing all manner of constructions.

We assume the companies with arrangements with governments are paid at arm’s length, in accordance with the procurement laws. Then, why shouldn’t they pay taxes, like others? The provision does smell mischief, whose results will be revenue leakages.

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