Turnover Tax (TOT) is one of the most controversial taxations in Kenya. It was introduced in 2008 through the Finance Act 2007, to simplify how small and medium-sized enterprises (SMEs) file their taxes. The introduction was met with some resistance as businesses argued the new tax would burden small businesses. This led to its suspension in 2010 to the relief of SMEs. Yet, the government was worried that these businesses would evade taxation with its suspension because other tax obligations barely captured the revenue from the informal sector.

Recognizing the need for revenue collection in the informal sector and the need to distribute the tax burden equally among all citizens, the Kenyan government re-introduced TOT in 2020 via the Finance Act 2019. The taxation has seen significant changes over the years, the latest being a rate increase from 1% to 3% in 2023. This post unpacks everything you need to know about Turnover Tax in Kenya.

Understanding Turnover Tax in Kenya

Turnover Tax is a tax charged on small and medium-sized businesses in Kenya whose annual turnover is between Ksh. 1,000,000 and Ksh. 25,000,000. Turnover is the total amount of money your business makes from the sale of goods or services over a specific period. It is the gross revenue collected from your business before deducting expenses like salaries, business capital, rent, etc.

The rate of turnover tax in Kenya is 3% on gross sales according to the Finance Act of 2023. The new rate took effect in July 2023, rising from the previous 1% based on the Finance Act 2019.

Turnover Tax Eligibility in Kenya

As we mentioned, TOT is exclusive to SMEs. This doesn’t mean every SME in Kenya is obligated to pay this tax. Below are the eligible entities that are expected to pay TOT in Kenya:

1. Any resident individual or corporation whose business turnover exceeds Ksh.1 million but doesn’t exceed Ksh. 25 million in any year of income.

2. A TOT registered taxpayer trading VATable supplies. If they have a turnover of Ksh. 5 million and above, KRA demands they register for VAT too.

Note: A person may request to be exempted from TOT by writing to the KRA commissioner. If you do so, KRA will apply other provisions in the Income Tax Act.

TOT Exemptions in Kenya

Which individuals and businesses are exempted from the TOT tax obligation? They include the following:

• Non-resident taxpayers.

• Rental income- it’s already subject to another tax regime

• Management, professional, or training fees

• Income that’s subject to a final withholding tax under the Income Tax Act. E.g. Dividends and Interests.

• Employment income- it's already subject to another tax regime

Who is the Primary Target for Turnover Tax in Kenya?

Turnover Tax in Kenya targets SMEs. The TOT threshold is businesses with an annual turnover of 1-25 million Kenya shillings. These entities include:

• Small and medium-sized retail shops

• Informal sector service providers such as hair stylists, salons, barbershops, spas, beauty parlors, and repair shops

• Small and medium-sized manufacturing enterprises

• Market traders and hawkers

• Other SMEs in the informal sector who meet the TOT eligibility criteria

How and When To Submit Turnover Tax in Kenya

Turnover Tax in Kenya is submitted every month. KRA recommends filing this return on or before the 20th day of the month following the end of the tax billing period. For example, you are required to remit January’s TOT on or before the 20th day of February.

As mentioned earlier, the TOT rate is 1.5% of your gross revenue. Calculate this amount and remit it via a KRA-partner bank or MPESA. KRA-partner banks include:

• Absa Bank (formerly Barclays Bank)

• Cooperative Bank of Kenya

• Family Bank 

• Equity Bank

• Diamond Trust Bank

• I & M Bank

• National Bank of Kenya

• Kenya Commercial Bank (KCB)

• NCBA Bank

If your business isn’t registered for Turnover Tax, you need to do so before remitting this tax. Follow the steps below to register for TOT:

1. Go to https://itax.kra.go.ke/KRA-Portal/ and log in using your KRA PIN and password.

2. Navigate to the Registration module and select Amend PIN Details.

3. You’ll see the question “Do you want to register for TOT?” under Section A, basic information. Click Yes.

4. Go to section B>Obligation Details and select the date of registration of TOT. Submit the application.

How to File Turnover Tax

Follow the steps below:

1. Visit the KRA portal and log in to your account.

2. Navigate to the Returns menu and click File Return>Turnover Tax. Download the returns form.

3. Complete the returns form and submit it.

4. Go to the Payment Menu. Select Payment>Amount Payable, and generate the payment slip.

5. Make the required payment via MPESA or KRA-partner bank.

Penalties for Turnover Tax

Failure to file TOT returns or late payment attracts several penalties. 

• Late filing penalty: If you file your TOT returns later than the agreed date, it attracts a penalty of 1,000 Kenya shillings per month.

• Late payment penalty: Late payment of TOT tax attracts a penalty of 5% of the due tax.

• Unpaid tax interest: For every month you don’t pay your TOT tax, a 1% interest is applied to your outstanding balance.

Avoid these penalties by filing your TOT returns and remitting the payments on time. If you need professional help with TOT compliance, we are here to help. Gichuri & Partners is your number-one tax consultant in Kenya.

Pros and Cons of Turnover Tax in Kenya

As we mentioned at the beginning of this article, TOT is one of the most controversial tax obligations in Kenya. It has its fair share of advantages and disadvantages. 

Pros

Some TOT advantages include:

• A simplified filing and payment process- you can even pay via mobile money services like MPESA

• Revenue growth for the Kenyan government

• Shared tax obligation between formal and informal sectors, decreasing the burden on the formal industry

• Growth opportunities for SMEs. Businesses have formalized their operations in the wake of TOT, which creates an opportunity for growth through better credit access, legal protection, and market share.

Cons

TOT’s drawbacks include:

• Double taxation- some businesses that pay TOT are also expected to pay VAT, Income Tax, and other tax regimes too. There’s potential for double taxation.

• It’s exploitative- TOT is based on the gross income, instead of the profits a business makes. It’s deemed exploitative, especially for businesses operating on losses or with thin profit margins.

Conclusion

The Turnover Tax in Kenya ensures the informal sector contributes to national revenue, sharing the tax burden with the formal sector. With good record-keeping and awareness of how it works, it shouldn’t be hard to pay and file your TOT returns. This comprehensive guide discussed everything you need to know about Turnover Tax in Kenya. If you’d like professional assistance or consultancy to be tax compliant, Gichuri & Partners is the best tax consultant in Kenya. Contact us and we will gladly help.