The once glorified turnover tax, popularly known as TOT, was reintroduced from January 1 following enactment of Finance Bill 2019 into law last year. TOT is payable by resident persons whose sales in a year of income do not exceed Sh5 million. The tax should be charged at the rate of three percent of the gross monthly sales and is payable by the 20th day of the following month.
Unsurprisingly, TOT’s reintroduction has been praised and criticised in equal measures.
Government pundits believe that it is an unexploited source of tax revenue. However, small-scale traders and businesses have strongly condemned the tax, if the recent media coverage is anything to go by. TOT had previously been in existence for 10 years from 2008 but performed dismally in terms of revenue collections. TOT was replaced by a complementary tax known as presumptive tax on the eve of 2019. The reason for shifting from TOT to presumptive tax is a discussion for another day, but it is worth noting that at the moment a high breed of the two taxes is being used with any presumptive tax paid being offset against monthly TOT payable.
The general principles of turnover tax are to an extent similar to those of Value Added Tax (VAT) despite the two classes focusing on different cadre of taxpayers primarily distinguished by the Sh5 million sale’s threshold. However, a taxpayer has an option of choosing VAT over TOT.
So what is different this time round with the re-introduction of TOT? The main essence of turnover tax around the world and especially in developing countries such as Kenya is to bring the informal sector to the tax net. The informal sector is by far the biggest employer in Kenya and its taxation would significantly contribute to Kenya Revenue Authority (KRA)’s revenue collection targets which stand at Sh1.7 trillion this financial year.
Majority of Kenyans in the informal sector shy away from tax registration and self-declaration of their income for tax purposes. The reasons may vary: some decry the bad state of social amenities such as roads and hospitals, others complain of the widespread corruption and mis-management of public funds, for others the cost of living is so high such that their businesses are struggling to meet their basic needs let alone pay taxes.
As a result, it is very difficult to tax the informal sector as it consists traders and businesses which are not registered or regulated in any way. Taxing the ‘jua kali’ sector, as it’s popularly known in Kenya, would therefore require registration and formalisation of the traders/businesses.
Ideally, KRA should strategise on how it can willingly or unwillingly register key players in the informal sector such as mama mbogas, kiosks, barber shops, roadside food vendors among others, if they are to achieve any success in collection of turnover taxes.
The January TOT return and payment was due by February 20. Nevertheless, KRA has given less in way of detailed guidelines and taxpayer education of how informal traders will register, file returns and make payments.
The Authority has neither communicated nor educated the general public on the strategy and method they intend to use to execute collection of the tax.
The initial signs suggest that we should not expect any hair-raising efforts with regards to the implementation and enforcement of the turnover tax. It is therefore more or less likely that the status quo will be maintained.
In my view, nothing superior has been included in the newly reintroduced TOT regime. This is an indication that TOT may remain in an oblivious state just as it did over the 10 years it had been in force unless watertight measures are put in place.
The writer is the African tax lead at Cardino.