All you wanted to know about taxes

Kenya Revenue Authority David Gishoi on January 26th 2016 on Nairobi's Kimathi Street. PHOTO | CHRIS OMOLLO

What you need to know:

  • This is unlike for other taxpayers where the instalments are spread evenly at 25 per cent of the tax due and payable on or before the twentieth day of the fourth, sixth, ninth, and twelfth months of the year of income.  
  • This is because if they want to sell their value added product to say distributors like supermarkets, then they cannot do it unless they issue them with an Electronic Tax Register (ETR). Yet for one to be issued with the ETR, they must first register for VAT.

As you strive to make your agribusiness profitable, there is a lot you need to know on your tax obligations. David Gichohi, a senior officer in Domestic Taxes Department at the Kenya Revenue Authority, breaks down all that you wanted to know about agricultural taxes

Are farmers required to pay taxes?

Anyone engaging in farming as a business is obliged to submit an income tax return every year. Income tax is based on the net profit the farmer makes during the year as stipulated in the Income Tax Act.

The tax is payable by both individuals, partnerships and corporate taxpayers. Farmers or organisations with income chargeable to tax must obtain a Personal Identification Number (PIN). 

However, for those doing farming as a hobby or for subsistence, they do not need to pay taxes as long as they are not getting income from it.

How are taxes on agricultural ventures paid?

Chargeable income is determined after preparation of a profit and loss account. The account should be submitted after the end of the year or accounting period. These accounts must show all the income that a farmer earned during the year from sale of farm produce and all the related expenses.

Tax is payable by way of instalments. The difference in income taxes payable in the agricultural sector as opposed to other fields is in the tax rates.

For the agricultural sector, unlike other income taxes, we have two instalments; one at 75 per cent on the ninth month and another at 25 per cent on the twelfth month of the year of income. These must be paid on, or before, the twentieth day of the month. It’s structured like this because of the maturity period of crops.

This is unlike for other taxpayers where the instalments are spread evenly at 25 per cent of the tax due and payable on or before the twentieth day of the fourth, sixth, ninth, and twelfth months of the year of income.    

After the farmer has paid the taxes in the year, he is then expected to prepare final accounts showing the tax due. They should then compare the tax due with the tax instalments that have already been paid.

The accounts would help a farmer establish whether there’s a tax balance. This tax balance has a deadline to be paid, which is the last day of the fourth month following the end of year income or accounting period.

If a farmer is not in the taxable income bracket, do they still need to file tax returns?

After the end of the accounting period, the taxpayer has a grace period of six months to submit returns.

The self-assessment return or the income tax return and accounts for any year of income should be submitted by the last day of the sixth month following the end of year of income or accounting period.

That means returns must be filed by June 30 of the following year for individuals. For example, the return on income for 2015 is due before June 30, 2016.

An individual has no tax liability if her income from all sources does not exceed Sh133,620 annually.

For a limited company or cooperative, filing the returns should happen before the sixth month after the end of the accounting period.

This is because for an individual or a partnership, the accounting period coincides with the calendar year while for the rest, the date is determined by their accounting period or date of application of PIN.

The emphasis here is that by the time the tax payer is filing the returns with KRA, they should already have paid all the taxes. And this is where most people go wrong. In that they think that by the time of filing returns, this is when they are expected to pay the taxes.

Are there any dangers of a farmer failing to pay taxes?

Failing to pay taxes exposes one to punitive action, whether the tax is paid after the applicable deadline or not at all. One suffers 20 per cent penalty for paying their tax late and interest of two per cent for every pending month. Filing of returns is mandatory as long as one has a PIN, even if they did not get taxable income.

The returns do not necessarily translate into a payment. It could be a nil return if you have made no income or profit for the year. Nobody is exempted from filing returns as long as they are a PIN holder.

Besides farms, what other agribusinesses do you target for taxation?

Other than income tax, farmers who add value to their produce may be required to register for Value Added Tax (VAT).
The vast majority of farmers are not registered for VAT, nor are they obliged to be registered for VAT.

However, if the farmer processes their farm produce, they must register for appropriate taxes like VAT and standard levy, which KRA collects on behalf of Kenya Bureau of Standards every month. 

If there is processing involved, a farmer may or may not apply for VAT, although it has become apparent that a majority of the serious processors register voluntarily because they have realised it is to their advantage.

This is because if they want to sell their value added product to say distributors like supermarkets, then they cannot do it unless they issue them with an Electronic Tax Register (ETR). Yet for one to be issued with the ETR, they must first register for VAT.

There are those who will not buy your product unless you can issue them with ERT.

However, if one is processing, for instance, juice for the informal market, say by the roadside, then they don’t require to register for VAT.
KRA only expects you to register for VAT if you have a turnover of Sh5 million or more in a year. Where the farmer processes their farm products like fruits to juices, they should consult KRA to confirm whether they should register for VAT, excise duty, or standards levy.
What about farmers who are exporting their produce?
When one exports his produce as unprocessed, then it’s to their advantage that they register for VAT to benefit from input tax reduction on cost of logistics involved in the endeavour such as expenses in packaging and transport of the merchandise to the destination country and refunds of VAT incurred in farming business.

Unprocessed farm products are VAT exempt if the farmer sells his produce locally. Let’s say you harvest mangoes and sell them locally, they are VAT exempt. But if you export the same, they become zero-rated, that is, you don’t pay tax on the goods you are exporting.

Are there agribusiness activities that are excluded from taxation?

Farmers are allowed to claim a Farm Works Allowance for capital expenditure incurred on the construction and installation of farm assets.

They include farm buildings (excluding dwelling houses), irrigation works, electrical installation on the farm, fences, roads, holding yards, drains, land reclamation and other supplementary works such as walls.

KRA has been giving the allowance since January 2011, and farmers can claim 100 per cent of the expenditure in the first set of accounts within which they installed them.

KRA as the tax collector understands that farmers have to incur a lot of expenses to set up an effective farm. You are supposed to recover the investment on the equipment in the first year of installation.

Farmers also get loss relief such that the losses are carried forward and offset against future profits from the same enterprise.

What happens is that if an investment is substantial, it is understandable that the agricultural enterprise could not reasonably have been expected to become profitable until after some years.

For example, if you have accumulated losses of Sh500,000 in the first year, Sh400,000 in the second year, and another Sh600,000 in the third year; and then in the fourth year, you make a profit of Sh700,000, and another Sh800,000 in the fifth year, it is expected that you will be given relief from paying tax for the last two years of profit in compensation for the previous losses of the same amount.

But those losses must be wholly and exclusively incurred in the production of income of the farm.

Expenses which are wholly and exclusively incurred in the production of income are deductible in the computed taxable income, which is essentially profit.
For a farmer who pays cess, are they still required to file returns or pay taxes?

Cess is considered in this case as an allowable expense in the computation of profit. Cess is not tax, for us it’s an expense that you have to incur in business in the determination of profit, just like they would incur transport expenses.

What does it take to file tax returns?

Taxpayers should visit any KRA offices or Huduma Centres for assistance. The tech-savvy ones can do it themselves online on our iTax platform.
How difficult or easy is it to collect taxes from farmers?

Collecting tax is a challenge in all sectors. However, KRA enhances voluntary tax compliance by providing what is expected to be tax compliant.
Everything has to be filed under the iTax platform. The slip must be generated through the iTax system. But before you start processing, you need guidance on all the processes.