Low profit margin firms ‘punished’ in minimum tax roll out

High turnover but low profit margin yielding firms are expected to see the bitter end of the minimum tax effected at the start of the year.

This is as the government indiscriminately require firms to make minimum tax deductions irrespective of whether they lie in profit or loss making for as long us one percent of their turnover exceed outstanding income tax.

Only persons engaged in business whose retail price is controlled by government such as oil marketing companies (OMCs) and Kenya Power and those in insurance are exempt from the tax.

According to PKF Partner Michael Mburugu, firms in categories such as fast moving consumer goods (FMCG) are expected to feel the greatest pinch from the tax as they feature very high turnovers but with meagre profit margins.

“It’s actually a punishment so to speak. We did present this argument to the National Assembly, but we do know how the government is hungry for money. Think of a business in FMCG such as a supermarket. The margins are so low that at no point will the income tax exceed one per cent of turnover,” he told Citizen Digital on Tuesday.

The views by Mburugu are closely mirrored by the Retail Trade Association of Kenya (RETRAK) which submitted similar proposals to the Finance and National Planning Committee in December during the consideration of the Tax Laws (Ammendment) [No.2] Bill, 2020.

The Committee would however shoot down the proposal to exempt such businesses.

Other entities to protest the roll out of the tax through the Parliamentary submissions included the Kenya Association of Manufacturers (KAM), the Kenya Private Sector Alliance (KEPSA). Deloitte and Touché, PwC and the Kenya Bankers Association.

Law firm Anjarwalla & Khana which also made submissions saw its proposals to mend the tax to include the exemption of newly incorporated businesses shot down by the Committee.

The minimum tax is further seen as taking away incentives such as capital allowances to companies in tax loss positions by demanding minimum tax from the very entities.

In its defence for shooting down tens of proposals to amend the minimum tax provisions, the Finance and National Planning Committee stuck by the National Treasury’s plan of expanding the tax base.

“The minimum tax which shall apply to all persons whether they are making profits or incurring losses and seeks to expand the tax base and also ensure that companies that make perpetual losses contribute towards enabling the government in the provision of services. The rationale for this tax is that even where companies are making losses, they continue enjoying facilities, such as infrastructure, whose cost of construction continue being serviced by the government,” said the Committee chaired by Gladys Wanga.

The minimum tax came into being through the 2020 Finance Act as Treasury Cabinet Secretary Ukur Yatani sort to force loss making entities to remit taxes.

Mburugu has slammed the roll out of the minimum tax as Voodoo economics as he warns the country’s tax regime is quickly mimicking that of a banana republic.

“The impact of this tax is going to be so counterproductive that I would bet the tax would be reviewed in another year. Anybody seeking to put up new investments in Kenya will have to think twice. This will have a direct impact at a time when we really need to resuscitate an ailing economy,” he added.

The minimum tax is seen accelerating job cuts and profit warnings as businesses see more weight added to an already burdening tax obligation.

On Monday, the Kenya Tea Development Agency (KTDA) for instance stated farmers would be in the line to lose up to Ksh.754 million from the new tax.

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