Minimum tax in Kenya
VTDP shall be effective 1st January 2021 and shall be in effect for a period of 3 years up to 31st December 2023.

The newly introduced minimum tax has been greeted with mixed reactions and of course strong passions in opposite directions. The opponents of this idea argue that this is a tax on losses while the proponents argue that “losses” have to be taxed. There are two contrasting perspectives to losses raising fundamental questions on our business environment and reporting culture. Probably with the new tax deeper issues will emerge. 

What’s new with minimum tax? Businesses are now being charged tax on gross receipts at a marginal rate of 1%. Conventionally, businesses are taxed on their profits, and that option still exists provided the tax on profits is more than tax on gross receipts. Taxing businesses on profits as it has always been means that loss making entities comfortably escape the taxman’s noose.

Bear in mind that the onus of determining profits or losses rests on the taxpayer. The underlying notion in minimum tax is that every business is selling and further sales can be objectively determined.

Here comes the argument by the opposing side; that the new taxes will ruin loss-making entities. In my view, there are three types of loss-making entities to address here. First are businesses perpetually making losses on book but by any other standard they are flourishing. How they survive successive periods of loss making, they know, we know, and the tax man seems to have known. They are the targets of this new tax.

Second category are businesses in capital intensive sectors and volatile environments like mining which by their nature experience oscillations between profits and losses. The drafters of this law seem to have had this spirit by exempting the extractive industry. In other jurisdictions like Tanzania they exempt agriculture. My take is that these sectors be identified and be accommodated in the scope of exemption.

My third categorization is genuinely loss-making businesses. There’s a possibility of some enterprise owners hanging on to loss-making ventures hoping against hope. The wisdom of Konosuke Matsushita, a Japanese philosopher and founder of Panasonic Electronics, gives courage.

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He quips: “If we cannot make a profit, that means we are committing a sort of crime against society. We take society’s capital, we take their people, we take their materials, yet without a good profit, we are using precious resources that could be better used elsewhere”.

I concur with Konosuke Matsushita, persons holding on to productive resources, masquerading as business people should be urged to release their capital. That’s a conversation for another day especially with some rural dwellers claiming to be farmers. Minimum tax can initiate that debate.

Another perspective to minimum tax is the reintroduction of turnover tax. Businesses with annual turnover of less than Ksh50 Million fall in the turnover tax regime; minimum tax is for entities that are not registered with turnover tax. It is not a coincidence that the two taxes are charged at 1% of the gross receipts. If smaller businesses must pay taxes at 1% then their larger counterparts should at least pay the same. This addresses two fundamental issues in taxation, fairness and closing loopholes for tax evasion.

If loss-making entities have always been here with us, what have the lobby groups, policy makers and industry players been doing about it? Let’s expand the scope of this conversation beyond taxation.

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