One way that businesses can avoid the taxman is by declaring losses, sometimes even when a business is doing well. You find several businesses that are doing extremely well and thriving, but books of accounts state otherwise, and since they do not declare any profit, they end up not paying taxes.

Kenya Revenue Authority moved in to seal the loophole by introducing a minimum tax. Companies in Kenya will pay a minimum tax of 1% of their gross turnover, irrespective of whether they make a profit or a loss. This tax is payable quarterly and this means in April 2021, companies in Kenya will start paying the tax for the first time.

This new tax which came into effect on 1 January 2021 has raised many concerns because of the adverse effects it may have, some unintended.

Kenya's new tax will affect low margin businesses

A wholesaler of Fast Moving Consumer Goods (FMCG) highlights the problem associated with the minimum tax. For example, a wholesaler sells a bale of maize flour (Kenya’s staple food) at KShs 1080, making KShs 20. The business has small margins and depends on huge volumes.

With the new minimum tax, he will have to pay KShs 10 as tax, leaving him with KShs 10. Loading and offloading costs are about KShs 3, and there are other costs such as fuel and logistics.

Initially, he was only expected to pay taxes on the taxable income, but this new law demands taxes from the gross sales. For such business to be profitable, he will have to increase the prices. This directly translates to an increase in the cost of living.

Tax from the first day

With minimum tax, businesses will be required to pay tax on their first day of operation. No grace period or room to allow for proper establishment. If you burn capital, you will pay taxes on that. If you make losses, you will pay taxes on that. The only hope is that you can claim that in the future when you make profits, but this would only work if your total profit is more than 1% of your turnover.

In other words, if your profit is less than 1% of your total turnover, you are making losses.

This approach to taxation is something that worries the Kenya Association of Manufacturers (KAM). A loss-making company may need to borrow money to pay taxes, which means they will be paying taxes out of their pockets or capital.

It is also a big blow to new business because, besides the challenges associated with starting a business in Kenya, there will be mandatory taxes to service.

Taxing loss-making businesses

While there are businesses that may want to hide in loss-making to avoid taxes, it is a normal occurrence for businesses to experience losses.

The unfortunate thing is that the tax will make it harder for businesses going through tough times to pull through. Besides the need to find money to remain afloat while waiting for the tide to turn, such businesses will have to find money to pay the taxman.

This is punitive and will cause businesses great harm.

A better approach

If Kenya Revenue Authority is genuinely after netting those who are hiding behind losses to avoid paying tax, it should have made it easier for businesses that are not in that category to survive.

One of the ways to achieve this is to give a grace period to new businesses so that they can establish themselves. KRA could also set the maximum number of years that a business could be allowed to make losses before being forced to pay tax. This way, new and genuine loss-making firms will be spared.

KRA should also exempt more businesses from this tax to save retailers and wholesalers who have smaller margins. As it is now, the tax could kill the distribution channel and run many people out of business.

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