Traders beware: Turnover tax can eat all your profit!

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

09 February 2020

Turn Over Tax (TOT) has given many traders a lot of grief. The common complaint I have heard is: why is this government putting up so many taxes? Well, TOT is not another tax but another way of calculating tax.

It was first introduced in 2008 and then repealed in 2018 after it failed to reach the target group. It was set up as an opt-in process where traders who wished to join applied to the Commissioner of Income Tax for inclusion. That was a mistake and it has now been rectified.

The time round, TOT was rolled out in two phases. First, the taxman introduced a presumptive tax that is calculated at 15 per cent of the county government trade license. This is collected at the same time as the license fee. This was a data-gathering phase to find out who are traders and where they are.

The second and final phase was introduction of TOT, proper. All traders who are paying the presumptive tax are now required to pay TOT as well. Unlike before, it is now an opt-out process where all are included, but those wishing to be removed need to apply to the commissioner.

TOT is calculated at three per cent of the gross sales of the business. It is applicable to traders whose turnover is less than Sh5 million per year. However, those who are registered for value added tax do are not included – they remain in the normal income tax regime.

Traders are allowed to deduct all the presumptive tax from the TOT. Thus, if trader pays an annual trade licence fee of Sh20,000, the presumptive tax comes to Sh3,000. Suppose that in the first month he makes sales worth Sh300,000. The TOT on this is Sh9,000.

Therefore, in the first month of trading, he pays Sh9,000 – Sh3,000 = Sh6,000 as TOT. After that, if he sells another Sh300,000 in the second month, he will have to pay the Sh9,000 as turnover tax.

Now suppose this trader’s gross profit margin is the 30 per cent; his gross profit out of the Sh300,000 monthly sales will be Sh90,000. Assuming, further that his other business expenses are Sh30,000 would leave Sh60,000 as profit before tax.

Now we subtract the TOT of Sh9,000 and that leaves the trader with Sh51,000 as net profit after tax. This translates to 15 per cent in taxes. What if this trader was in the normal income tax regime?

A person who earns Sh60,000 would pay about Sh10,600 in PAYE each month. Thus, the trader is better off in TOT. However, if the profit before tax was lower, say, Sh50,000, the TOT would still be Sh9,000 (assuming same turnover of Sh300,000) while the PAYE is Sh7,600.

In such a case, the trader would be better off to apply to be removed from the TOT and remain in the normal income tax. Furthermore, if his profit before tax is less than Sh9,000 but still with turnover of Sh300,000, then TOT would leave him in a loss!