Why it’s time to rethink Kenya’s turnover tax

Turnover tax is provided for in Section 12 (C) of the Income Tax Act and applies to businesses whose turnover ranges between Sh1 million and Sh25 million per annum, with the rate of tax being three percent of annual turnover as last amended via the Finance Act 2023.

Globally, the case for turnover tax is often two-fold.

For the taxpayers, it lowers the compliance headache, especially from a cost and administration perspective, because sales are far easier to ascertain than profits.

For the authorities, it eases the burden of tax administration, widens the tax base and helps address the perennial headache of domestic revenue mobilisation in economies where the informal segment is dominant.

Close to two decades later, statistics from the KRA suggest that the collections realised through turnover tax still fall far short of the capabilities that official data shows should be within reach.

Whereas the Treasury estimates that the taxable base within the country’s informal sector stands at a tidy Sh2.8 trillion, the KRA data shows that turnover tax collections in 2023-24 stood at just Sh391.0 million from 45,940 business ventures.

Where could the challenges be with the country’s turnover tax regime?

Jurisdictions that also apply turnover tax, such as India and South Africa, appear to be keen to ensure that there is alignment between the threshold for value-added tax and that of turnover tax because an overlap of the two defeats the whole purpose of a simplified tax regime targeting micro and small businesses.

This does not seem to be the case in Kenya since eligibility for VAT registration kicks in at an annual turnover of at least Sh5 million, while the band for turnover tax runs from Sh1 million all the way to Sh25 million in annual turnover.

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The issue here is this: if a business whose annual turnover ranges between Sh5 million and Sh25 million per annum is deemed to be unsophisticated enough to merit being in the turnover tax regime, why is the same business deemed to be sophisticated enough to navigate the complexities of VAT registration and filing? Is this not a contradiction?

Could the overlap between the threshold for VAT and that of turnover tax be a deterrent for those businesses that may be willing to regularise their compliance through the simpler tax on gross sales regime, but have concerns around the implications from a VAT compliance standpoint?

Perhaps Finance Bill 2026 should present an opportunity to revive the conversation around an upward revision of the VAT threshold as is envisioned in the Medium-term Revenue Strategy and had been proposed by Finance Bill 2024, but more importantly, pursue its alignment with the turnover tax threshold to remedy this anomaly.

Another aspect to consider in the potential reform of turnover tax is the possibility of borrowing from South Africa’s turnover tax regime and introducing bands as opposed to the present flat rate applying across all businesses.

I believe the case for this consideration is critical because a look at the average number of new businesses onboarding for turnover tax since its inception points to something worth considering.

According to data from the KRA, between the financial years 2008-09 and 2018-19, the average number of new businesses registering for turnover tax each year stood at 797. Between 2019-20 and 2022-23, this average shot up dramatically to 4,803 businesses annually.

The key thing to note here is that this drastic jump in the average number of new businesses registering for turnover tax coincides with the Covid-19 relief measure that saw the Tax Laws (Amendment) Act 2020, which revised the rate of turnover tax from three percent to one percent.

Could this be a pointer that there is a case for a lower turnover tax rate than the present three percent? A lower than three percent rate of turnover tax will not be unique to Kenya. Seychelles has the rate at 1.5 percent, Angola has it at two percent, and Cameroon has it at 2.2 percent.

Looked at another way, could it be a pointer that application of more than one rate, through bands as is done in South Africa, promises a more optimal architecture of the turnover tax regime? The jury lies in a more granular deep dive into the data held by the taxman.

All said and done, it has been a little shy of two decades since Kenya adopted turnover tax and the build-up into the 2026-27 budget cycle and more specifically, Finance Bill 2026 presents an opportune moment to look into the rear view mirror and take stock of the lessons learned.

The writer is the host of Business Redefined & CFO Chat on NTV Kenya and a Research Fellow at the Strathmore Tax Research Centre