Traders operating small and mid-sized businesses will from today start paying a three percent tax on their sales to the Kenya Revenue Authority (KRA) following the re-introduction of the levy, which looks set to hurt enterprises struggling with low revenues.
The Finance Act 2019, which President Uhuru Kenyatta signed into law on November 7, reintroduced the turnover tax for businesses whose annual sales are below Sh5 million to boost tax collections.
The new tax takes effect today and is expected to saddle small traders, who have raised concerns about deteriorating business conditions, with additional operating costs.
It is also expected to provide the KRA, under pressure to collect additional revenue, with a fresh avenue for raising taxes from small traders, the majority of whom have not been paying State levies.
The Treasury had in 2018 dropped the turnover tax due to its poor performance as most traders failed to make revenue disclosures.
But the small traders have suffered from the modest economic activity that has cut cash flow and hit business sales.
Kenya’s economy expanded more slowly year-on-year in the third quarter of this year than in the same period in 2018 as activity proved lacklustre in various sectors including manufacturing and agriculture—which accounts for a third of economic output.
Corporate Kenya has witnessed reduced profitability that has ushered in job cuts, freezes in hiring and near stagnant wages in the race to protect profit margins.
The national and county governments have also delayed payments estimated at more than Sh100 billion owed to suppliers, forcing some to cut back operations, shed jobs or face auctioneers after failing to service their bank loans.
As a result, the amount of cash in Kenyans’ pockets has dropped to a four and half-year low with Central Bank of Kenya (CBK) data showing that money circulating outside banks dropped to Sh176.9 billion in October — the lowest since July 2015.
The effects of this has been below target collection of payroll taxes — levied on workers’ monthly pay— and which account for nearly half of KRA collections.
Corporate taxes, which come from business profits, have also been hit in an environment where a record number of firms listed on the Nairobi Securities Exchange are issuing profit warnings.
This has forced a cutback on KRA’s tax collection target for the year ending June to Sh1.7 trillion from the in
itial Sh1.81 trillion.
Collections from small traders are part of the new tax measures that are expected to boost collections and help the taxman hit the revised target.