Spare SMEs from paying turnover tax, says lobby

Work in progress at Avoveg Limited, a company dealing in the processing and export of horticultural produce, during the company's post-COVID-19, phased reopening of business to local and international markets. [David Njaaga, Standard]

Manufacturers’ lobby has warned that the move to start taxing small businesses turnover tax will have a huge impact on their business operations.

The Kenya Association of Manufacturers (KAM) now wants the minimum tax abolished or suspended, until when effects of the Covid-19 pandemic, which has affected the economy, is managed.

The manufacturers argue the introduction of the minimum tax will hurt the economy and reduce Kenya’s attractiveness to investors. “Introduction of a new tax based on turnover will hurt a company’s financial well-being such as creating cash flow constraints,” noted the manufacturers’ body.

“Minimum tax targets loss-making small companies that already face difficulties in paying taxes, especially with the current Covid-19 impacting businesses negatively.”

The lobby said the tax comes at the height of a pandemic and was not well thought out and should be shelved. Local businesses will start paying a minimum tax starting next month that will be charged at the rate of one per cent of the gross business turnover.

President Uhuru Kenyatta signed into law the 2020 Finance Bill in June this year.

The charge was introduced in the Finance Act 2020 to boost the government's revenue collection. Among businesses expected to be hardest hit by the taxation are low margin businesses, capital intensive businesses with tax incentives, new businesses, and loss-making companies.

The manufacturers’ body demands that the tax is only applicable after five consecutive years of loss declaration for all companies.

This plea was echoed by Fredrick Ogutu, a lawyer and senior tax consultant at Deloitte East Africa. “Imposing an additional burden in the form of minimum tax on such companies would exacerbate their financial challenges,” he said.

KAM also wants 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.

Exemptions should be allowed for firms such as those that deal with exports, it noted. “The proposed tax will negatively affect business operations and hamper cash-flow, pushing struggling entities to premature closure leading to loss of jobs and taking the economy into a downward spiral,” KAM says.

“It is highly unlikely that a new business would be profitable in the first few years of operation. Adding a tax burden on an unprofitable business will make Kenya’s economic environment not conducive for start-ups and businesses whose break-even period is longer.”

KAM also says businesses could load the minimum tax to customers, increasing the cost of consumer goods and services- making Kenya uncompetitive in the global market. The tax will likely lead to capital flight to favourable tax regimes in the region.

Kenya’s manufacturing sector grew at 3.2 per cent compared to 4.3 per cent growth in 2018.

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