IT 10

Turnover tax and the taxation of small businesses

1Scope and legal basis

Section 12C of the Income Tax Act charges turnover tax (TOT) on a resident person whose gross turnover from business is more than KES 1 million and does not exceed KES 25 million in a year of income, at 1.5% of the gross receipts (the Finance Act 2023 reduced the rate from 3% to 1.5% and set the KES 25 million ceiling, from 1 July 2023; the Finance Act 2020 had earlier moved the floor to KES 1 million and repealed the presumptive tax on business permits). TOT is a final tax on the business income in place of the normal computation of profit, expenses and capital allowances, and it applies to sole traders, partnerships and companies alike unless they are excluded or elect out. It is designed for the small and micro enterprises that make up most of Kenya's businesses, and it sits beside the KES 5 million VAT registration threshold, the eTIMS invoicing rules and the county single business permit.

2Key definitions

Gross turnover

The total receipts of the business from the sale of goods and services in the tax period, before any deduction for cost of sales, expenses or capital allowances, and exclusive of VAT where the person is VAT registered.

Tax period

A calendar month; TOT is returned and paid monthly, unlike income tax which is annual.

Excluded income

Rental income (taxed under section 6A or the normal regime), management, professional and training fees (subject to withholding and the normal regime), income of a non-resident, income subject to final withholding tax (qualifying dividends and interest), and income of incorporated companies with turnover above the ceiling. A person with excluded income and other business income is within TOT on the other business income only.

Election out

A person within the band may elect, by notice to the Commissioner, to be taxed under the normal regime (section 12C(4)); the election is for a year of income and is usually made where margins are thin, the business is loss-making or start-up capital allowances are large.

3Charge, computation and rates

Who pays what

Annual gross turnover	Regime	Rate and base	Other obligations
Up to KES 1,000,000	Normal income tax (in practice often nil after personal relief); no TOT	Graduated rates on net profit	PIN, eTIMS (buyer-initiated invoicing for small suppliers), county permit, annual return
KES 1,000,001 to 5,000,000	Turnover tax (unless excluded or elected out)	1.5% of gross monthly receipts, final	Monthly TOT return; not required to register for VAT; eTIMS invoices
KES 5,000,001 to 25,000,000	Turnover tax (unless excluded or elected out)	1.5% of gross monthly receipts, final	Must register for VAT (16% on taxable supplies) and file monthly VAT returns; TOT is computed on receipts exclusive of VAT
Above KES 25,000,000	Normal income tax	Graduated rates (individuals) or 30% (companies) on taxable profit	VAT, instalment tax, annual return with accounts

Kamau's hardware shop versus Kamau Hardware Ltd

Sales for 2026 KES 12,000,000; cost of sales 9,000,000; expenses 1,800,000; capital allowances 300,000. Net profit 1,200,000; taxable profit 900,000.

Under TOT: 1.5% × 12,000,000 = KES 180,000 for the year, paid at KES 15,000 a month on average by the 20th of each following month. No expense or allowance claims; no annual income tax computation on the business (an annual return is still filed showing the TOT).

Under the normal regime (electing out) as a sole trader: tax on 900,000 at the graduated rates = 28,800 + 25,000 + (900,000 - 388,000) × 30% = 153,600 + ... : first 288,000 at 10% = 28,800; next 100,000 at 25% = 25,000; remaining 512,000 at 30% = 153,600; total 207,400 less personal relief 28,800 = KES 178,600. Roughly the same as TOT here; a thinner margin (say 5%) would make the normal regime cheaper and a fatter one (20%) would make TOT cheaper.

As a company with the same figures: 30% × 900,000 = KES 270,000 under the normal regime against TOT of 180,000, so the company stays in TOT. Because sales exceed KES 5 million, VAT registration is compulsory either way: 16% on taxable sales with input tax credits, and TOT on the VAT-exclusive receipts.

Interaction with other rules

Withholding tax deducted from a TOT taxpayer's receipts (3% contractual fees on a small contractor, 0.5% on supplies to a public entity) is a credit against the TOT; where it exceeds the TOT it is refundable on application.
A TOT taxpayer still deducts and remits PAYE, withholding tax and VAT as an agent, still pays the advance tax on commercial vehicles (credited against TOT), and still needs eTIMS invoices for its own sales; its customers may deduct purchases only against eTIMS invoices.
Capital gains on the sale of business land or buildings are outside TOT and taxed at 15% under the Eighth Schedule.
Losses: a TOT taxpayer cannot claim losses; a business expecting losses in its first years elects out and claims capital allowances and loss carry-forward (five years) under the normal regime.
Turnover is tested on the actual turnover of the year; a business that crosses KES 25 million during a year moves to the normal regime for that year and files an annual return with accounts; one that falls below KES 1 million stops paying TOT.
Presumptive tax (15% of the county single business permit fee) was repealed in 2020; the single business permit is a county charge and a deductible expense under the normal regime, not a tax credit.

4Compliance: returns, payment and penalties

Register the TOT obligation on iTax (the Commissioner may register a person compulsorily on the basis of eTIMS and third-party data), keep a daily record of gross receipts and copies of eTIMS invoices, file the monthly TOT return and pay by the 20th of the following month; a nil return is required for a month without sales.
Penalties: late filing KES 1,000 a month; late payment 5% of the tax plus interest at 1% a month; failure to register or to keep records attracts the Tax Procedures Act penalties, and understated turnover is assessed with the tax shortfall penalty.
The annual income tax return is still filed by 30 June (individuals) or within six months of year end (companies), declaring the turnover and TOT paid and any other income (employment, rent, investment) taxed under its own rules.
VAT: a TOT taxpayer above KES 5 million registers for VAT within 30 days of becoming liable, charges 16%, files monthly by the 20th, and deducts input VAT; the two taxes run in parallel on the same sales.

5Examinable focus

What KASNEB tests

Expect a small business with a turnover figure and a profit figure, asked whether it is within turnover tax, what it pays (1.5% of gross, monthly by the 20th), what it would pay under the normal regime, and whether to elect out; then whether VAT registration is required (the KES 5 million threshold) and what other obligations remain (PAYE, WHT, eTIMS, county permit). Know the exclusions (rent, professional fees, non-residents, final-WHT income), the treatment of withholding credits, and that losses and capital allowances are lost under TOT. Theory parts ask why turnover tax exists (simplicity, compliance cost, widening the base) and how the 2020 and 2023 changes reshaped it.