Bill targets loss-making firms with tax

Loss-making firms will from next financial year starting July 2020 be required to pay tax on their gross earnings in proposed changes to the income tax law geared at addressing low compliance levels.

Treasury secretary Ukur Yatani has in the Finance Bill 2020, presently before the National Assembly for approval, has proposed to introduce a new section that will see all persons whose income has not been taxed elsewhere pay tax at a rate of one percent of gross earnings.

The proposed levy to be known as minimum tax is seen as targeted at the corporates, which do not pay tax on their income when they report losses.

If the legislators approve the Bill, the affected persons, largely companies, will start paying quarterly taxes on their income on the 20th day of the fourth (April 2021), sixth, ninth and 12 months — reflecting the tax payment schedule for corporation tax.

The proposed provision spares those whose income has been subjected to Section 5 (employment), 6A (residential income tax), 12C (turnover) as well as eighth and ninth schedules of the Income Tax Act, which cover earnings such as capital gains and proceeds from mining or oil exploration.

The provision means that all firms earning more than Sh1 million will pay taxes to the Kenya Revenue Authority (KRA), with only small traders with an annual income of Sh1 million and below spared the monthly turnover tax at the rate of one percent of gross sales.

This comes on the back of shocking revelation that more than 90 percent of companies failed to pay corporation tax in the financial year ended June 2019 in what puzzled the KRA, which is usually reactive when it comes to tax compliance, and pointed to some degree of tax evasion.

KRA data presented to National Assembly in August 2019 showed that out of 401,306 companies registered for corporation tax in Kenya in the period to June, only 33,426 paid taxes on their net income. That translates to a compliance rate of 8.3 percent of the firms eligible to pay taxes from business profits, and worst-performing category when compared to segments such as payroll deductions, excise duty and value-added tax.