Why most small businesses face risk of costly penalties

Small businesses run the risk of costly penalties from the taxman should they fail to acquaint themselves with the newly introduced tax initiatives by the State, audit firm PricewaterhouseCoopers (PWC) has warned.

The businesses will be now be taxed a one per cent minimum tax on gross turn over - with the Finance Bill 2021 a few days shy of being assented to.

Experts warn the new law is shrouded with numerous grey areas.

PwC Senior Manager and Tax Policy Specialist Edna Gitachu said though the new laws may seem easy to implement, an in-depth analysis reveals intricacies and potential adverse business impacts including ability to utilise existing tax incentives, historical tax losses and tax credits.

“Some of the grey areas taxpayers are currently grappling with include the ability to utilise existing tax incentives, historical tax losses and tax credits while the commencement date for entities with non-December financial year ends is also not quite clear,” said the audit firm in its report.

Economic meltdown

The introduction of the minimum tax on the gross turnover by the State is seen as a move by the Kenya Revenue Authority to tax firms that are in perpetual loss-making positions.

Late last month, the Kenya Association of Manufacturers (KAM) warned the new tax will hurt small businesses yet to recover from the economic meltdown occasioned by Covid-19.

KAM said the minimum tax will hurt the economy and reduce Kenya’s competitiveness. 

KAM also wanted a reduction of the minimum tax rate to 0.25 per cent, in addition to the State allowing for set-off against the future tax, and a statutory definition of the tax.

Experts at PwC said the tax should be introduced to businesses that have been in operation for more than two years to enhance Kenya’s attractiveness as an investment hub.

This, they noted, will reduce the strain on startups and financially constrained entities.