Overview of Turnover Tax (TOT)
Turnover Tax (TOT) is a tax levied on the gross sales/turnover of small businesses in Kenya. It was reintroduced by the Kenyan government to simplify the tax compliance process for small businesses and to broaden the tax base. The TOT regime is designed to replace the normal income tax for eligible businesses, making it easier for them to comply with tax obligations.
Eligibility and Thresholds
To be eligible for TOT, a business must have:
- Annual gross sales/turnover between KES 1 million and KES 50 million.
- Businesses with turnover below KES 1 million or above KES 50 million are not eligible and must adhere to other tax regimes.
Exclusions
Certain businesses and types of income are excluded from TOT:
- Rental income
- Management and professional fees
- Training fees
- Income subject to a final withholding tax under the Income Tax Act
Tax Rate and Computation
- The tax rate for TOT is 1% of the gross monthly turnover.
- This rate applies to the total sales before deducting any expenses.
Filing and Payment
TOT is filed and paid on a monthly basis:
- Monthly Returns: Businesses must file their TOT returns by the 20th day of the following month.
- Payment: The tax must be paid by the same deadline (20th day of the following month).
Registration and Compliance
Businesses that meet the eligibility criteria must:
- Register for TOT with the Kenya Revenue Authority (KRA) through the iTax system.
- Maintain Basic Records: While TOT simplifies the process, businesses are still required to maintain basic records of their sales to substantiate their turnover.
Exemptions and Special Cases
- Businesses involved in VATable supplies are exempt from TOT and must register for VAT instead.
- Professional services and consultancies are excluded from TOT and must adhere to the normal income tax regime.
Benefits of TOT
- Simplified Compliance: TOT reduces the complexity of tax compliance for small businesses by eliminating the need for detailed record-keeping and complex tax calculations.
- Lower Administrative Costs: Since TOT is based on gross sales, businesses save time and resources that would otherwise be spent on detailed financial reporting and tax preparation.
- Encourages Formalization: TOT incentivizes small businesses to formalize their operations and register with the KRA, broadening the tax base.
Penalties for Non-Compliance
- Late Filing: A penalty of KES 1,000 per month or part thereof, up to a maximum of KES 20,000.
- Late Payment: A penalty of 5% of the tax due and interest at 1% per month on the unpaid tax.
Interaction with Other Taxes
- Exemption from VAT: Businesses under the TOT regime are not required to register for or charge Value Added Tax (VAT).
- Presumptive Tax: Businesses paying TOT are not subject to Presumptive Tax, which is levied on businesses operating without a formal business license.
Practical Example
Suppose a small retail shop in Nairobi has a gross monthly turnover of KES 400,000. Under the TOT regime:
- The shop will calculate its TOT as 1% of KES 400,000, which is KES 4,000.
- The shop must file its TOT return and pay the KES 4,000 by the 20th of the following month.
Conclusion
Turnover Tax (TOT) in Kenya aims to simplify tax compliance for small businesses with moderate turnover. By offering a straightforward taxation method based on gross sales, TOT helps businesses save time and resources while ensuring they contribute to the national revenue. For detailed guidance and up-to-date regulations, businesses should consult the Kenya Revenue Authority (KRA) or a professional tax advisor.