KRA's Minimum Tax: How It Affects All Businesses

A Kenya Revenue Authority (KRA) signage on a building

The Kenya Revenue Authority (KRA) introduced the Minimum Tax which came into effect on January 1, 2021, with the purpose of encouraging equity and fairness in the tax system. 

According to KRA, the Minimum Tax will apply to all businesses, whether they make a profit or not. 

Alongside the Digital Tax, KRA unveiled the Minimum Tax to raise revenue as they target collecting Ksh1.57 trillion for the financial year 2020/21. 

Kenyans purchase food commodities at Fig Tree market in Ngara, Nairobi in 2019
File spoke to Wanja Wangondu,  KRA's Assistant Manager of Taxpayer Services, who detailed the components of the Minimum Tax. 

What's a minimum tax?

Minimum tax is a tax for the business people. It is a base tax that is applied to the income whether you make a profit or not. 

This is because KRA charges 1 percent of the sales. Remember Corporation Tax was at 25 percent and is currently at 30 percent because you are allowed to claim expenses. Minimum tax comes at 1 percent of sales but without claiming expenses. 

What is the rate of the Minimum Tax?

KRA charges 1 percent of the gross sales.  

Is there a difference between the Minimum Tax and Instalment Tax?

Minimum tax is a sister to Installment tax. A taxpayer is not required to have a tax obligation called Minimum Tax as he is obligated to pay the Income Tax. He will either pay in the turnover tax regime or income tax regime for the business. So, the ones who are in the income tax regime currently remit a tax known as installment tax. The installment tax in smaller terms means that rather than paying tax at the end of the year, a taxpayer remits tax in the course of the year at specified periods. 

At the end of the year, if you look at the total taxes you have paid in the course of the year, suffice the tax you are supposed to pay and find that you paid more tax then you will get a tax relief fund. 

If you paid less tax, then you pay the balance or top-up. The installment tax is charged at 25 percent on or before the 20th of the 4th, 6th, 9th and the 12th months. 

Minimum tax now comes in when a taxpayer has projected the installment tax payable and compares it with 1 percent of the gross sales. The higher of the two is what we call the minimum tax. 

You are not paying both Installment and Minimum tax. You are paying the higher of the two.

Therefore Minimum Tax will be remitted on the 20th day of the 4th, 6th, 9th and 12th months. 

Kenyans shop inside a supermarket in Nairobi in March 2020

Do taxpayers file Minimum Tax?

No, you are not filing. They go to iTax and under a section labelled payment, they register and indicate whether the highest tax was Minimum or Installment Tax. KRA will generate a payment slip for the higher of the two. Taxpayers will not file any returns. 

Is there a cluster that is exempted from paying Minimum Tax?

Yes, the first person is those who pay the Turnover tax, Employment Income, Rental Income, Income from extractive industries, and those exempted from paying Income Tax. There are some institutions in Kenya who the law allows applying for Income Tax Exemption. They include those who relieve poverty, fund health, education and religions which are provided with a valid certificate. 

Will an online business that pays Minimum Tax to pay Digital Tax too?

Yes, they do. Digital Tax is for all digital marketplaces only and Minimum Tax is for all businesses, whether you are online or not. 

Are there penalties for defaulting Minimum Tax remittance? 

Yes, we will know if one defaults because we have registration data. Remember you can only conduct a business once you are registered and are issued with a licence. We will be cross-checking our data.

Yes, penalties will be the same as those applied under the Income Tax. But why would one default on paying tax? We are urging all taxpayers to comply and buy into the tax-paying requirements so that we can all avoid chasing after each other. 

Times Towers in Nairobi which houses Kenya Revenue Authority’s head office. Thursday, February 20, 2020.
Times Towers in Nairobi which houses Kenya Revenue Authority’s head office. The photo was taken on Thursday, February 20, 2020.