Taxation in Kenya

One of the first things you need to find out when you're starting any kind of business, be it a sole proprietor, Limited company, Partnership etc are the tax laws that apply to your business. It is important to consult a tax professional to help you with all the requirements that you must comply with, such Pay As You Earn (PAYE) tax, Corporate tax, Value Added Tax (VAT) etc.

In Kenya some of the basic tax compliance requirements according to the income tax laws relating to businesses are:

  •  Keeping of up to date books of account by businessmen,
  •  Acquiring of Personal Identification Numbers (PIN) by all potential taxpayers,
  •  Determining the taxable income according to the stipulated rules and regulation,
  •  Accurate determination of tax liability,
  •  Filing of returns on income by the prescribed date,
  •  Paying of tax dues by the prescribed date, payment of fines and penalties for overdue taxes and
  •  Allowing of audit by tax collectors if deemed necessary.

Below is an outline of some of the taxes that apply to the most business entities;

A. Income tax

Income Tax is a direct tax that is imposed on income derived from Business, Employment, Rent, Dividends, Interests, and Pensions among others. Every taxpayer with income chargeable to income tax is required to have a Personal Identification Number (PIN).

There are various methods of collecting income tax, which include:

1. Pay As You Earn (PAYE) tax
PAYE is a system of taxing employment income and is operated by all employers in Kenya. The Commissioner of income tax has mandated all employers to operate this tax and remit on a monthly basis to KRA. This will apply to almost all business entities.
Failure to collect this tax, the penalty is punitive. The penalty is not less than 25% of the tax due plus monthly interest of upto 2% per month.

2. Corporate tax
Corporate tax is a form of income tax that is levied on the income of corporate bodies such as limited companies, trusts, and co-operatives. Local companies are taxable at a rate of 30% while foreign companies are taxable at a rate of 37.5%. Income of registered unit trusts or collective investment schemes is exempt subject to specific conditions.

3. Withholding Tax
Withholding taxes are deducted at source from the following sources of income: Interest, dividends, royalties, management or professional fees, commissions, pension or retirement annuity, rent, appearance or performance fees for entertaining at various rates.

4. Advance Tax
Advance tax is applicable to all public service and commercial vehicles. It is not a final tax, but a tax partly paid in advance before a public service vehicle or a commercial vehicle is registered or licensed. It is mainly aimed at ensuring compliance.

5. Turnover Tax
This is an indirect tax that is applicable to small business taxpayers whose total amount of revenue/sales (turnover) is below KShs. 5 million. Thus, small business taxpayers who do not qualify for VAT pay the turnover tax. The Turnover tax is aimed at bringing businesses in the informal sector into the tax bracket. These include small scale manufacturing firms and Jua Kali businesses, agricultural enterprises and transport industries. The turnover tax rate is 3 percent. Businesses that make losses are exempt from turnover tax. There are various exception of this tax.

6. Capital Gains Tax
This was re-introduced recently after its suspension in 1985. A capital gains tax is a tax that is charged on the profit realized from the sale of an asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property.

B. Value Added Tax

Value Added Tax (VAT) is a consumption tax that is applied to the sale of goods and service. The tax is collected by traders and remitted to KRA, but the tax burden is shifted to consumers through higher prices. All traders who have a sales turnover of Kshs. 5 million per annum and above are required by law to register for VAT. After registering for VAT, the traders are obliged to collect and remit VAT on their taxable supplies, with an allowance to recover tax paid on their purchase of inputs. Only registered traders are required to charge VAT.