Local manufacturers have decried the planned rollout of a new tax law that will see all businesses compelled to pay one per cent of their gross turnover even when they make losses.
Companies say the minimum tax introduced in the Finance Act 2020, to be enforced from January 2021, is an attempt to push financially limping companies to the edge and will cause company closures, job losses and discourage new investments.
The move proposed to widen the tax base was meant to rope in firms that perennially declare losses – which are sometimes cooked – but will hit genuinely struggling corporates hard, according to manufacturers.
Kenya Association of Manufacturers’ (KAM) Research and Fiscal Policy Manager Simon Githuku said the new regulation may push companies that unable to meet costs of operations to look for money from other sources just to pay the one per cent tax.
“The Kenya Revenue Authority has sufficient capabilities to flag those cheating by declaring losses all the time and by compelling an already loss-making company to pay tax may mean they have to borrow to meet the obligation. This is even more difficult because no bank will lend you to go and pay tax when you are already making a loss,” Mr Githuku said in an interview.
Manufacturers met Treasury officials before the proposal became law after a memo detailing the effects of having such a tax on the manufacturing sector to Treasury failed to convince the mandarins.
KAM had described the tax as catastrophic, coming at a time when firms will be recovering from slowdowns occassioned by the Covid-19 contagion and given that even loss-making firms still pay several other taxes.
They include Pay As You Earn, Value Added Tax, Railway Development Levy and Import Declaration Fees while sourcing raw materials from overseas.
The tax is payable quarterly on the 20th day of the fourth, sixth, ninth and 12th of the month, keeping the companies on toes to analyse turnovers, which in many cases, fail to give the true financial health of any business.
“The proposed tax will negatively affect sustained business operations and significantly hamper cash flows. This will push struggling entities to premature closure, leading to loss of jobs and sending the economy on a downward spiral.
“The business closures will affect all economic sectors including the manufacturing sector and at a critical time for an economy trying to recover from the impact of Covid-19,” manufacturers wrote in the memo to treasury.
KAM says the law will hit retail businesses harder, as they rely on small margins from where extracting the one per cent minimum tax would be almost impossible, making them disadvantaged compared to those with wider margins.
Businesses will be difficult to start, as they will have a tax burden before they can even break even, a recipe for capital flight to favourable tax regimes in the region.