Eight business associations representing the business community in Kenya have come together to call for the abolishment of the 1% minimum tax introduced by the government.
The new bill expected to take effect on 1st January next year was introduced through the Finance Bill, 2020 (the Bill).
The bill was tabled in the National Assembly for debate and approval on 6 May 2020. This was a departure from previous years where finance bills would be introduced to the National Assembly after the reading of the national budget in June. This change was necessitated by recent constitutional interpretations issued by the court which barred the government from collecting taxes before the relevant tax provisions are approved by the National Assembly, and a subsequent amendment to the Public Finance Management Act, 2012 which required that the Finance Act be enacted by 30 June.
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Now eight associations are against a section of the bill that slaps a 1 per cent minimum tax on all individual businesses regardless of whether or not they make a profit.
The Associations, Kenya Association of Manufacturers (KAM), Law Society of Kenya (LSK), Institute of Certified Public Accountants of Kenya (ICPAK), Association of Kenya Suppliers (AKS), Retail Trade Association of Kenya (RETRAK), Association of Air Operators (AAO), Association of Kenya Insurers (AKI) and Kenya Tourism Federation (KTF), held an event to discuss the impact of the tax ton the economy.
According to the Kenya Association of Manufacturer (KAM Chairman,) Mr Mucai Kunyiha, the tax will have an adverse effect on businesses, including deterring start–ups, increasing costs to consumers and increasing cash flow constraints, which will consequently push struggling entities to reduce operations or worse, prematurely close down. “This will lead to loss of jobs and take the economy into a downward spiral of contraction, ”’ said Mr. Mucai added.
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According to an analysis by the Klynveld Peat Marwick Goerdeler (KPMG), the minimum tax is based on 1% of gross income and paid on the 20th day of the fourth, sixth, ninth and twelfth months. “The minimum tax is an attempt to tax businesses that are in a loss– making position and borrows from provisions in other countries where businesses that make losses are subject to a minimum tax. However, in those countries the businesses must indicate they have been reporting loss making for a number of years,.” KPMG explains.
Institute of Economic Affairs CEO, Mr Kwame Owino also noted that that taxation is a critical function in building sustainable and progressive economies. “‘The timing to impose such taxes on businesses is ill-advised. This unpredictability will overburden businesses and increase costs. We need to discipline public spending. Our debt is a spending problem and not a tax problem. This is a cynical way of collecting taxes because businesses will be taxed whether or not they make profits,”’ noted Mr. Owino.
The tax is aimed at bringing more enterprises into the tax bracket despite their financial status.
Rose Mwaura, Chair, Institute of Certified Public Accountants of Kenya (at ICPAK,) Chair stated that unfavourable tax policies not only discourage investment and growth, but they are also a disincentive to exporters, which in the long run dilutes our competitiveness. “The government does not generate revenue. Revenue comes from businesses and individuals. Therefore, for any economy to grow, the government must make it conducive for business to operate effectively,.” Ms. Mwaura said.
The analysis from KPMG also notes that this rate remains significantly higher than that for other businesses which are eligible for a tax rate of 1% on turnover under turnover tax for income ranging from KES 1 million ($9,093) to KES 50 million ($454,661). Further, the amendment on the lower threshold is in order to align with the current lower individual tax band.
Law Society of Kenya President, Mr Nelson Havi, also weighed in on the discussion adding that the tax burden in the country is so enormous in the country. “We need to enlighten the public and government, to see the need to abolish minimum tax, especially now, as we combat COVID -19,.” He said.
The Associations stated that they will continue more rigorous engagement with government in order to seek a better solution for local businesses, which are already hard hit by the COVID– 19 pandemic.
KAM is a business member organization representing value-add companies and associate services in Kenya. Its members’ significant contribution to the economy is estimated at a quarter of the country’s Gross Domestic Product. The Association provides an essential link for co-operation, dialogue and understanding with the government and other key stakeholders by representing its members’ views and concerns through fact-based policy advocacy.
A number of tax proposals that had been proposed in the Tax Laws (Amendment) Bill, 2020 but were rejected by the National Assembly, were reintroduced under the Bill and subsequently passed by the National Assembly, including the introduction of Value Added Tax on solar equipment and deep cycle batteries and scrapping of the Home Ownership Savings Plan (HOSP) incentives.