Breaking Down The Difference Between Presumptive Tax And Turn Over Tax

If you went to church, prayed and hoped for a better 2020 for the Small Medium Enterprises (SMEs) in Kenya, you better pray again because things are getting thick.

There has been a lot of talk about the SME sector and what the government should do to save it from going down the drain because of the many challenges the sector is facing.

In Kenya alone, close to half a million SMEs are shutting down annually, 30,000 monthly and 1,000 daily going by the stats from the Kenya National Bureau of Statistics (KNBS).

The SME sector, despite the numerous man-made challenges, still provides employment to 86 percent of Kenyans and contributes to about 45 percent of Kenya’s GDP.

To help choke the SME sector more, the Kenya Revenue Authority (KRA) has imposed a series of taxes on small businesses that are wiping them off the face of the earth one by one.

Apart from paying for various permits and approvals, SMEs are also paying for Value Added Tax (VAT) which is at 16 percent, Presumptive Tax at 15 percent and Turnover Tax at 3 percent.

With all these charges and taxes, SMEs in Kenya have no breathing space and the majority of them often have no otherwise but to wind up the business, leaving thousands without jobs.

READ: Top 10 Africa’s Biggest Borrowers From China In The Last Decade

Presumptive Tax

Presumptive Tax was introduced by the Finance Act of 2018 and mandated the Kenya Revenue Authority to charge 15 percent on permits on businesses with an annual income below 5 million shillings.

Presumptive Tax came into effect in January 2019 but it is among the most misunderstood taxes by Kenyan SME owners. To date, there are business owners who still don’t understand how the Presumptive Tax is charged.

Many SME owners still think that Presumptive Tax is the 15 percent of the total annual income. This is not the case. Truth is, the amount is charged on permits that are often issued by counties.

This is how the Presumptive Tax is calculated: say your permit was 20,000 shillings, with Presumptive Tax, you are paying 15 more, meaning you will pay 23,000 shillings annually.

Presumptive Tax, therefore, is 15 percent more on any amount you used to pay your business permit for before 2019. Understood? If not, drop us an email on info@sokodirectory.com and we shall break it down more.

Note: You can apply to be exempted from paying Presumptive Tax. You can do this by writing to the Commissioner of Domestic Taxes but upon approval, the business will fall under the Income Tax category.

There are penalties if you fail or delay to file Presumptive Tax. The penalty for late payment is 5 percent of the tax due while late payment interest is 1 percent of the tax due per month.

READ: ARVs Meant For Kenyans Shipped To West Africa After KRA Demanded Taxes On Them

Turn Over Tax

Turn Over Tax (TOT) is a tax charged on the income of a business whose annual total income is 5 million shillings or lower. Unlike the Presumptive Tax which charged on permits, TOT is taxed on the income itself.

Turn Over Tax was reintroduced by the Finance Act of 2019 and started taking effect in January 2020. Turn Over Tax is 3 percent of the total annual sales/gross of a business and is filled and paid on a monthly basis.

Note: Late filing of Turn Over Tax will attract a penalty of 5,000 shillings per month. Late payment will attract 5 percent of the tax due while interest on unpaid penalties is 1 percent of the tax due.

READ: Turnover Tax Re-Introduced, MSMEs to Pay 3% On Gross Sales