The National Treasury is being urged to consider abolishing the 1% minimum tax which comes to force on 1st January 2021 as it threatens the survival of small businesses in the country.
Eight associations which include 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) have voiced their opposition to the tax which they term counterproductive to micro, small and medium enterprises reeling from the effects of COVD-19.
“This tax will have an adverse effect on businesses, including deterring startups, increasing costs to consumers, and increase cash flow constraints, which will consequently push struggling entities to reduce operations or worse, prematurely close. This will lead to loss of jobs and take the economy into a downward spiral of contraction,” said Mucai Kunyiha, KAM Chairman.
Treasury introduced the base income tax at the rate of 1% of gross turnover arguing that some companies operating in Kenya continue to declare annual losses thus not contributing to tax revenue despite enjoying facilities, such as infrastructure, whose cost of construction and maintenance is serviced by the Government.
However, its introduction has been termed untimely given the current economic predicament triggered by COVID-19.
“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,” said Kwame Owino, Institute of Economic Affairs CEO.
Treasury is under pressure to raise revenues to bridge the budget deficit which has shot to Kshs. 1 trillion in the current fiscal year.
ICPAK Chairperson Rose Mwaura noted, “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.”
Section 12D of the Income Tax Act requires companies to pay a minimum tax in instalments which shall be due on the twentieth day of each period ending on the fourth, sixth, ninth and twelfth month of the year of income.