Background

The Finance Act 2020 introduced the Minimum Tax, a base income tax that will be payable by all persons to the Kenya Revenue Authority (KRA) on a quarterly basis irrespective of whether they make profits or not. The aim of this tax is to ensure fairness and equity across all taxpayers and will be charged at the rate of 1% of the gross turnover of the company. The introduction of minimum tax was a remedial measure to address shortcomings associated with self-assessments of tax on business incomes.

The minimum tax is a final tax and shall be paid in installments that will be due on the 20th day of each period ending on the 4th, 6th, 9th and 12th month of the year of income.

Who is eligible for Minimum tax?

The minimum tax is intended for taxpayers who are carrying out business and earning revenue but their tax payable is lower than 1% of their gross turnover.

Minimum tax will be charged alongside instalment tax, such that it will be applicable if it is more than the installment tax.

Comparing Installment tax and minimum tax

While both minimum tax and installment tax are payable by the twentieth day after every quarter of the accounting year, that is, (after the fourth, sixth, ninth and twelfth month), they can be differentiated as follows;

Minimum Tax Installment Tax
1. Minimum tax is a final tax Installment tax is an advance tax
2. Computed at 1% of gross turnover Computed based on estimated tax payable for a year of income
3. Minimum tax is for businesses earning revenue but whose tax liability is below 1% of their gross turnover Installment tax is paid by persons who have tax payable for any year that amounts to KES 40,000 and above.

 

Will minimum tax result into double taxation?

There will be no cases of double taxation since only the higher of the two taxes will be payable to KRA.

For instance, where installment tax payable is higher than the minimum tax, then a tax payer shall pay installment tax. However, if the minimum tax is higher than the installment tax then a taxpayer will pay the minimum tax.

Scenario

Which tax between minimum tax and instalment tax is applicable for company A with a gross turnover of Kshs 1,500,000 and with varying profits as illustrated below?

Tax >1%gross turnover 1%gross turnover> tax Tax <1%gross turnover
Company A Company A Company A
Gross Turnover                           1,500,000          1,500,000       1,500,000
Less Cost of Sales                             (1,050,000)         (1,050,000)      (1,300,000)
Gross profit                                450,000             450,000         200,000
Less Operating Expenses            (150,000)            (420,000)        (250,000)
Net Profit/(Loss)             300,000              30,000          (50,000)
Corporate Income Tax @ 30%               90,000                9,000                  –  
Minimum Tax @ 1% gross turnover               15,000              15,000           15,000
Tax Applicable               90,000              15,000           15,000

 

Incomes Exempt from Minimum Tax

 The following incomes are exempt from the Minimum Tax; 

  • Income exempted by the Act
  • Employment income
  • Income that is subject to Residential Rental Income Tax
  • Income that is subject to Turnover Tax
  • Income that is subject to Capital Gains Tax
  • Income of extractives sector

For more information regarding this alert, please contact;

Beatrice Kamau

Outsourced Services Manager

t +254 715 248882 |  +254 733 533449

bkamau@mgkconsult.co.ke