When starting up a business, proprietors must note that all income is taxable as per the tax laws of the country in which they operate. Business income is no exception.
A business person needs to ask himself a few questions in this regard:
In the case of sole proprietors who are not organized into registered organizations, their business income/loss must be declared in their individual income tax returns. For employed proprietors, business tax income is declared alongside that of employment.
In the case of partnerships, business profit/loss must be declared in the partners’ individual tax returns alongside their other income whether it is from employment or otherwise. This means that the business does not pay any taxes, but all profit/loss is fully declared in the separate partners’ returns as per their share in the partnership, and remitted by the individuals to the tax authorities.
Limited Liability Companies, on the other hand, are subject to corporate tax at the prescribed rates. This tax is computed from taxable income netted of allowable expenses. Part of the allowable expenses may include salaries paid to owners of the companies, which are themselves taxable as employment income.
Types of taxes obligations
Broadly, taxes are divided into direct and indirect taxes. Start-up businesses will be affected by all types of taxes.
These taxes are levied directly to the taxpayer. They are also called income tax. They include:
Corporation income tax – Kenyan resident company’s rate is 30% of profit before tax. Startup companies that are structured as private limited are required to file annual tax returns and remit this tax to KRA.
Employment income tax – Startup companies with employees are required to deduct and remit tax as below:
Residential Rental income tax – This is tax chargeable on residential property rental income. Startup companies in this sector must comply and remit this tax to KRA.
Investment income tax – This is the tax on income from investments including interest and dividends. Startups who earn investment income must declare the same in their tax returns.
Services income tax – Professional and other services income are taxable as guided by tax laws. Startups earning this type of income must declare it — those receiving such services if required to withhold tax when paying must do so.
Pensions income tax – The pension part that was allowable at source is taxable on maturity/withdrawal. Startups need to be clear on this and tell their staff as much.
Advance tax – This is payable by public service vehicles (PSV) and commercial vehicles at the time of annual inspection. Startups in this sector need to be prepared when the time of inspection comes. They also need to be conversant with the rates.
Installment taxes – This is part of estimated annual income taxes paid quarterly in equal installments. Any startup must pay this quarterly tax if their annual tax liability that is not covered by PAYE equals or exceeds Kshs 40,000.
Capital Gains Tax (CGT) – This is the tax levied on the gain made on sale of property or shares (with exceptions). Startups must know that any transfer of property or shares will attract CGT, in addition to stamp duty, as may be applicable.
Penalties and interest – Non-payment or delayed payment of taxes attracts penalties and interest payable to the tax authorities. This also forms part of the tax regime, and it is in the interest of any startup to know how this may affect them.
These are taxes derived from consumption. The final consumer bears the full tax. They include:
Value Added Tax (VAT) – Corporates that have a turnover exceeding Kshs 5 million per annum are required to charge VAT on vatable supplies and remit to KRA the difference between output and input VAT. Startups who project to hit the Kshs 5 million turnovers in the next 12 months must register for VAT.
Excise Duty – Tax imposed on specified goods manufactured in Kenya and those imported into Kenya as well as specified services. This is guided by the Excise Duty Act of 2015, whose schedules are revised with every annual finance bill. This tax is payable by corporates and individuals dealing with excisable goods and services. Common targets for excise duty include tobacco products, alcoholic beverages, mobile phone and banking services, mineral water, etc. Startups dealing with excisable goods and services must carefully read and understand the excise duty regulations and charge and remit the correct tax.
Custom duty & levies – These include import duties such as excise duty, VAT, import declaration fee, and railway development levy. Startups involved with the import of goods or services must be conversant with this array of duties and levies relating to importation and how they affect their pricing.
Other Taxes/levies – applicable to startups according to their industry:
County levies – County governments impose these in the jurisdiction of operations. They include Property taxes such as rent & rates, User charges such as water bills, User fees such as parking charges, market charges, advertising fees, approvals fees, cess, and License fees such as Single Business Permits and liquor licenses. These apply to all businesses including startups.
Tax on Agency Revenue – This is tax collected by KRA on behalf of other government entities. They include Stamp Duty collected for Ministry of Lands and Betting, Gaming and Pool tax.
Road maintenance levy
Import Declaration fees
Second-hand motor vehicle purchase tax
This article has been written by an Expert from Zenuha