What is the meaning of “small scale business” in taxation?

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

02 June 2024

Last month, I had a back-and-forth discussion with Kenya Revenue Authority (KRA) officers on Internet social media regarding Turnover Tax (TOT). The officers insisted repeatedly that this tax is meant for “small scale businesses”. But when I checked the income tax law, I found that the phrase “small scale business” does not appear anywhere in the Act of Parliament!

The law clearly defines what kind of business qualifies for TOT. It says that this tax is for those whose annual turnover is between Sh1 million and Sh25 million. The question then is: are these “small scale businesses”? Such enterprises have daily sales of between Sh3,300 to Sh83,000. Can they be described as “small”? In my opinion: NO!

Now this with KRA officers discussion was triggered by a query from an artisan (fundi) on whether he can register his business in TOT. He has been doing household repairs for some time and, now, the owners of a large building want to give him a contract to be carrying out maintenance work. The jobs are expected to bring in about Sh200,000 to Sh300,000 in monthly sales. That is approximately Sh2.5 million annually. This is a big break for the fundi who has been making under Sh30,000 per month!

KRA officers are reluctant to place the fundi’s company in TOT because, in their reasoning, it is a “construction company” (its registered name is something like XYZ Construction Ltd). I was trying to convince them that the name doesn’t matter: what matters is the amount of turnover coming in – the Sh2.5 million per year.

Indeed, even if the fundi was to get a contract to build complete houses, the turnover is unlikely to go about the TOT threshold. Such work could last about 9 months (if done non-stop) per house. The total construction of an average house may be about Sh5 million. Out of this, only about 30 per cent goes to labour costs; that is, Sh1.5 million. Thus, the annual turnover comes to about Sh2 million – assuming he can get building contracts back-to-back. This is still within the threshold of TOT.

By the time of writing this, the fundi was still waiting to get enlisted on the TOT. The moral of this story is that government bureaucrats need to get out of their offices more often and interact with the real world outside. The reality is that there are very few construction companies with annual turnover exceeding Sh25 million!