Why SMEs will no longer need complex tax records

The Covid-19 pandemic has threatened the global economy and governments across the world are now formulating and implementing various fiscal measures to mitigate the adverse effects and provide relief for businesses and livelihoods.

In Kenya, the government moved swiftly to intervene by implementing a raft of measures to mitigate the effects of the pandemic, and provide the much-needed relief to the economy and to sustain livelihoods. 

Among the measures put in place by the Government is the reduction of the Value Added Tax (VAT) rate from 16 per cent to 14 per cent; reduced tax rates for both corporate and personal income (PAYE) from 30 per cent to 25 per cent and provided 100 per cent tax relief for persons earning a gross monthly income of up to Sh24,000. 

Significant to note, however, is the lowering of the Turnover Tax rate from 3 per cent to 1 per cent aimed at supporting the Micro, Small and Medium Enterprises (MSMEs). Besides, the government also directed that a further Sh10 billion be allocated for payment of verified VAT refund claims. 

KRA commends these measures targeting MSMEs because of the contribution MSMEs make to both local and global economy. Reportedly, the regulatory costs of doing business show that taxes, in particular VAT, are the most challenging set of regulations for SMEs, deterring them from meeting their obligations appropriately.

Tax compliance

KRA’s resolve to ease MSMEs taxation compliance is aimed at easing doing business, enabling additional business entry and expansions, as well as boosting mass entrepreneurship. Therefore, KRA is undertaking simplification of tax measures to lower tax compliance costs and provide small businesses with a conducive environment to allow them to explore their capabilities. Reduced tax compliance costs can encourage increased SME creation and compliance with the tax regulations.

To deal with this phenomenon, KRA is implementing a data-driven VAT Compliance Strategy. The strategy is aimed at reducing the VAT compliance gap, as well as implementing a compliance management model that segments clients by sector and accords interventions based on compliance level and history.

First is the recent introduction of the Turnover Tax (ToT), a simpler tax regime for MSMEs, where they will be paying taxes through simplified processes including payment of taxes through mobile phone platforms, achieved by the recent introduction of mobile application-KRA MService, to improve service delivery to the taxpayers. 

Under the simplified regime, taxpayers will not be required to prepare complex records of account. The eligible taxpayers will only be required to keep a daily gross sales record.  KRA has been consulting with concerned stakeholders to facilitate them to register and pay the taxes due.

Secondly, there is an established measure to address inevitable disputes arising from compliance challenges due to various reasons including the issuance of additional assessments.  Prolonged legal disputes as witnessed in litigation may have considerable implications for the MSMEs operations, especially on their financial enterprise’s liquidity. Therefore, KRA has revamped its Alternative Dispute Resolution framework. 

Refunds

A key measure in enhancing SME compliance is faster refunds claims processing to reduce delays of payments.  The good news is that KRA’s resolve to effectively and efficiently reduce delays in refunds claim processing, from an average of 133 to 60 days is now paying off. A notable milestone on this is the payment of Sh25 billion of VAT refund claims for financial years 2018/2019 and 2019/2020 out of a total of Sh36.1 billion processed claims.

The two most common types of VAT refunds are made pursuant to the provisions of Section 17(5) of the VAT Act 2013, which allow refund of excess input tax to a registered person where; such excess arises from making zero-rated supplies; or such excess arises from tax withheld by appointed VAT withholding agents; and the registered person lodges the claim for the refund of the excess tax within twenty-four months from the date the tax becomes due and payable.  Excess input tax arising from other sources e.g. unsold stock is not refundable.

KRA has also put in place appropriate measures, including implementation of the green channel framework to fast track the processing of low-risk claims and established a full-time project team to process the backlog claims. Furthermore, a dedicated office whose key role is to facilitate the MSMEs has been setup.

Meyo is the Commissioner for Domestic Taxes Department, KRA.