All you need to know about Turnover Tax (TOT)

In the government’s bid to cushion taxpayers from the adverse effects of the Covid-19 virus, it re-introduced new tax measures. The measures included the reduction of the Turnover Tax (TOT) rate.

Turnover Tax (TOT) is a tax charged on gross sales of a business as per Sec. 12(c) of the Income Tax Act.

Turnover Tax (TOT) is payable by resident persons whose gross turnover from business is more than Kshs. 1,000,000 and does not exceed or is not expected to exceed Kshs 50,000,000 in any given year.

TOT does not apply to:

1. Persons with business income below Ksh. 1,000,000 and above Kshs. 50,000,000,

2. Rental Income,

3. Management, Professional and Training Fees,

4. Any income that is subject to a final withholding tax under the Income Tax Act

Rate for Turnover Tax (TOT)

1. Turnover Tax is charged at the rate of 1% on gross sales.

2. Expenses are not deductible.

3. This is a final tax.

Filing of TOT Returns

TOT will be filed and paid on a monthly basis. The due date is on or before 20th of the following month.

Penalty for Non-Compliance

1. TOT late filing penalty is Kshs. 1,000 per month

2. Late payment penalty is 5% of the tax due

3. Interest on unpaid tax is 1% of the principal tax due.

Emerging Issues under TOT

1. The tax rate reduction from 3% to 1%

2. The removal of Presumptive Tax

3. The change in filing regime from quarterly basis to a monthly basis.

4. The change in threshold from below Ksh. 1M to between Ksh. 1M and Ksh 50M. This will imply that business with a turnover above Ksh. 5,000,000 will pay both TOT and VAT, as the VAT registration limit still remains at Kshs. 5 million.

Note: In the event that a legible taxpayer wishes to change from income tax to Turnover tax, they will write a letter to the commissioner for the change and await approval.

Therefore, the computation of TOT for businesses registered for VAT will involve exclusion of output VAT as demonstrated below.

Example: Assuming a business with an annual turnover of Kshs.6,000,000 and is registered for VAT and total Gross turnover per month is Kshs.500,000.

Kshs.

Total Gross turnover per month 500,000

VAT as calculated from the total gross turnover (70,000)

Turnover to be declared in the TOT return 430,000

Turnover Tax 4,300