Definition
Turnover Tax (TOT) in Kenya is a simplified tax regime for resident micro, small, and medium enterprises (MSMEs), levied on a business’s gross sales rather than its net profit. It is considered a final tax, meaning withholding tax fully settles the taxpayer’s tax liability for this specific income and businesses aren’t required to file an additional annual income tax return for income subject to TOT. Tax is applied on gross sale and no deductions for expenses are allowed.
Application
TOT applies to resident individuals and corporate entities whose gross annual business turnover is more than KShs 1,000,000 but does not exceed KShs 25,000,000. Businesses can, however, elect to opt out of TOT and be taxed under the normal annual income tax regime by notifying the Commissioner.
Exemptions from TOT include;
- Rental income,
- Management, professional, or training fees, income already subject to final withholding tax,
- Non-resident taxpayers,
- Businesses with gross turnover below KShs 1,000,000 and
- Certain Charitable Organizations/Public Institutions.
Filing and payment
Filing and payment for Turnover Tax are due monthly, on or before the 20th day of the month following the end of the tax period.
Penalties for Non-Compliance
Late filing of TOT return: A penalty of KShs 1,000 per month is levied for each month or part thereof that the return remains unfiled.
Late payment penalty: A penalty equivalent to 5% of the tax due is charged for payments made after the stipulated deadline.
Interest on unpaid taxes: An interest charge of 1% of the principal tax due per month is applied to any unpaid tax amounts.
VAT Registration for TOT Payers
Turnover Tax registered taxpayers who deal in vatable supplies—goods or services subject to Value Added Tax—and whose turnover reaches or exceeds KShs 5,000,000 are concurrently required to register for VAT. When calculating the TOT due, it is imperative for taxpayers to deduct the Output VAT from their gross receipts before applying the TOT rate. This mechanism is crucial for preventing the double taxation of the VAT component within the reported gross sales figure.
Legislation
As per the Finance Act 2023, effective July 1, 2023, the current Turnover Tax rate is 1.5% on gross sales. This Act also reduced the upper eligibility threshold from KShs 50,000,000 to KShs 25,000,000.
Registration process
Registration for Turnover Tax is facilitated online through the Kenya Revenue Authority’s (KRA) iTax platform.
Record Keeping Requirements
Taxpayers registered for TOT are primarily required to maintain records sufficient for the accurate determination and ascertainment of the tax. Clear and organized records of daily gross sales and daily purchase documents.
Strategic Considerations for Businesses Regarding TOT Eligibility and Election
Contact your tax expert for a sensitivity analysis especially where the business profit margin is slim and expenses are relatively high for optimal decision making on your tax obligations.
