In a bid to streamline and simplify the taxation process for small and medium-sized businesses, Kenya introduced the Turnover Tax (TOT) regime, offering a straightforward approach to taxation.
This article provides an in-depth understanding of Turnover Tax, covering its rates, eligibility criteria, exemptions, benefits, registration process, filing procedures, and associated penalties.
Understanding Turnover Tax
Turnover Tax (TOT) is a tax imposed on businesses with a gross turnover exceeding Kshs. 1,000,000 but not surpassing or expected to exceed Kshs. 25,000,000 during any given year of income. Governed by Section 12 (C) of the Income Tax Act (CAP 470), TOT is designed to simplify the tax obligations of qualifying businesses.
Rate of Turnover Tax
As of July 1, 2023, the rate of Turnover Tax is set at 3% on gross sales, as per the provisions of the Finance Act 2023.
Eligibility for Turnover Tax
Any resident individual or corporate entity with a gross or expected turnover ranging from Kshs. 1,000,000 to Kshs. 25,000,000 is eligible for Turnover Tax. However, businesses falling within this bracket have the option to opt-out of TOT by providing written notice to the Commissioner. Turnover Tax registered entities engaged in vatable supplies with a turnover of Kshs. 5,000,000 and above are also required to register for Value Added Tax (VAT).
Exemptions under Turnover Tax Regime
Turnover Tax does not apply to:
- Rental income
- Management, professional, or training fees
- Income subject to final withholding tax under the Income Tax Act, such as qualifying dividends or qualifying interests
Additionally, non-resident taxpayers are not subject to Turnover Tax.
Expenses and Claims under Turnover Tax
Unlike other tax systems, Turnover Tax operates on gross sales, and therefore, no expenses are allowed for deduction. TOT is a final tax, simplifying the tax calculation process for businesses.
Benefits of Turnover Tax
- Reduced Record Keeping: TOT-registered taxpayers are only required to maintain daily gross sales records and daily purchase records, minimizing record-keeping expenses.
- Simplified Filing and Payment: The TOT system streamlines filing and payment processes, offering simplicity and efficiency, including mobile payment options through the M-Service App.
- Reduced Time for Tax Compliance: TOT reduces the time spent on filing and paying taxes, enabling businesses to focus on their core operations.
- Final Tax Status: Turnover Tax is a final tax, eliminating the need for businesses to file an end-of-year Income Tax return on income subject to TOT.
Registration for Turnover Tax
Businesses can register for Turnover Tax online through the iTax platform by following these steps:
- Login to iTax using your PIN and password via https://itax.kra.go.ke.
- Click on the Registration module and select ‘amend PIN details.’
- Under Section ‘A,’ basic information, click ‘yes’ under the question ‘Do you want to register for TOT?’
- Under Section ‘B,’ Obligation details, select the date of TOT registration and submit the application.
Due Date for Filing and Paying Turnover Tax
Businesses subject to Turnover Tax must submit a return and pay the tax due to the Commissioner by the 20th day of the month following the end of the tax period. The filing and payment process involves:
- Login to https://itax.kra.go.ke.
- Under the returns menu, select ‘file return,’ then ‘turnover tax,’ and download the Excel return.
- Complete the return and submit.
- After filing the return, go to the payment menu, select ‘payment,’ choose the amount payable, and generate a payment slip.
- Make the payment at a partner bank or through M-PESA.
Penalties for Turnover Tax Non-Compliance
Late filing of TOT returns attracts a penalty of Kshs. 1,000 per month. Late payment incurs a penalty of 5% of the tax due, and interest on unpaid tax is 1% of the tax due.
Conclusion
Turnover Tax stands as a simplified tax regime, easing the compliance burden for qualifying businesses in Kenya. By understanding the nuances of TOT, businesses can optimize their tax management processes and leverage the benefits offered by this streamlined taxation system. Compliance with TOT ensures a smooth and efficient financial operation, allowing businesses to focus on growth and sustainability.
