Understating the Informal Sector (Presumptive tax): The finance Bill of 2018 was designed to generate an additional Ksh 27.5 billion in tax revenue for the financial year 2018/2019 in Kenya (You can read the 2018 budget statement). This article is going to focus on how those in the informal sector (Freelancers, self-employed, bloggers, startups, vendors, small shops, kiosks e.tc) will be taxed with the introduction of the Finance Bill of 2018, Income Tax (Presumptive tax).
Presumptive Tax for Self-employed and Startups in Kenya
Background: In 2006, the Finance Act of 2006 through the Income Tax introduced TURNOVER TAX to target individuals in the informal sector of Kenya. While reading the 2018 Budget statement (available here), Cabinet Secretary for National Treasury Henry Rotich indicated that the TURNOVER TAX system of taxation has largely been unsuccessful and the levels of compliance remained low due to the profile of the sector.
He therefore proposed an amendment to the Income Tax act that replaced TURNOVER TAX with PRESUMPTIVE TAX .
What is Presumptive tax?
Presumptive tax is taxation based on the business permit or trading license fees at a rate of fifteen percent (15%).
This therefore means that if you run any kind of business and you have a business permit provided by the county government you fall in this group and you will have to pay a tax of 15% of the fee you pay to renew your business permit.
Finance Bill of 2018, Introduction of the Presumptive tax in the Income Tax Act
Below are details of a section of what the acts says as retrieved from the Finance Bill of 2018 amendment.
12C. (1) Notwithstanding any other provision of this Act, a tax to be known as presumptive tax shall be payable by a resident person whose turnover from business does not exceed five million shillings during a year of income
(2) The presumptive tax shall apply to all persons who are issued or liable to be issued
with a business permit or trade license by a county government in a year of income.
(4) The due date for payment of tax under subsection (1) shall be at the time of payment
for the business permit or trade license or renewal of the same.
(5) Notwithstanding subsection (1), presumptive tax shall not apply to income derived from;
- (a) management and professional services; or
- (b) rental business; or
- (c) incorporated companies.
The rate of presumptive tax shall be an amount equal to fifteen percent of the amount payable for a business permit or trade licence issued by a County Government: Provided that the tax charged shall be final .”
Penalties of Failing to pay Presumptive tax
- A person who fails to pay tax on the due date shall be liable to pay a late payment penalty of twenty percent of the tax due and payable.
Late payment of interest at a rate equal to two per cent per month or part of a month on the amount unpaid for the period until the tax is paid in full (shall also apply).
- A person liable to a late payment penalty or interest may apply in writing to the Collector for the remission of the penalty or interest payable and such application shall include the reasons for the application.
- where the amount of the penalty or interest exceeds one million five hundred thousand shillings, the collector shall seek prior approval of the Cabinet Secretary responsible for finance; and (ii) make quarterly reports to the Cabinet Secretary responsible for finance on the remissions granted
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