Following the onset of the Covid-19 pandemic, the government in a bid to cushion taxpayers form the adverse effects of the Covid-19 virus re-introduced new tax measures. The measures included the reduction of the TOT rate from 3% to 1% for businesses whose annual turnover is above one million and not exceeding fifty million shillings in any year of income.

Eligible companies currently paying corporation tax may opt to change to TOT following amendments in the Income Tax Amendment Act 2020.

Exemptions

The turnover tax shall not be applicable to the following persons or businesses

  • Rental Income
  • Management or professional or training fees or
  • Any income which is subject to final withholding tax.

Implications of companies registered for TOT and VAT

Limited Companies and businesses with a turnover of over 5 million will still be subjected to VAT as per the VAT Act terms that are well outlined in SCHEDULE SIX (Including registration, deregistration and changes affecting registration).

The VAT registration limit still remains at Kshs. 5 million.

Therefore, the computation of TOT for businesses registered for VAT will involve exclusion of output VAT as demonstrated below.

Scenario:  A business with an annual turnover of Kshs.500,000 and is registered for VAT.

Kshs.
Total Gross turnover per month 500,000
VAT as calculated from the total gross turnover 61,403
Turnover to be declared in the TOT return 438,597
Turnover Tax 4,386

Process of changing from Income tax to Turnover Tax.

In the event that a legible taxpayer wishes to change from income tax to Turnover tax as stated above, then the following procedure should be applied;

New and eligible taxpayers are advised to log onto iTax, add the TOT obligation, file the monthly returns and make payment. (Through iTax)

Existing taxpayers under the income tax obligation will write a letter to the commissioner for the change.

Read Also: Turnover tax Compliance Guide

Penalties for non-compliance Turnover Tax

Failure to file and pay Turnover tax by the 20th day of every month will be penalized. A nil return should be filed where a business/company does not have taxable income in a month.

Additionally, any late payments will attract a 5% penalty on the tax due whereas late filing attracts a KSh 5,000 penalty per month.

Conclusion

Compliance with this tax is set to be enforced by KRA. As such, businesses eligible for the Turnover tax must register for the Turnover Tax obligation on the taxpayer’s itax online portal.