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Taxes You Need to be Aware of Before Setting up a Business

If you are thinking about starting a business in Kenya, you must first understand what is required by the government to familiarize yourself with all the legal expectations.

Kenya is known for tough regulations and taxation that have made some small businesses fail to nascent into profitability years after taking off. This perhaps, could be based on one’s failure to understand what they need to remit to government when the time comes.

Experts say that it all depends on the kind of business you want to start and the direction of that business will dictate the kind of taxes you will be exposed to and how they will affect your business directly.

Sammy Aloyo, tax consultant during a podcast interview on August 3, 2022.

“If you are running a side hustle, and you get exposed to these income for tax purposes, you are advised to form an entity. An independent entity that is independent of view and your employment so that at the end of the period, you file tax called PAYE as an individual,” says Sammy Aloyo, who spoke to Business Hour.

If you are an individual and running a business and fail to pay the tax, one is personally liable for failing to make the payments. If you have other people on board and procured a loan to run the business, the director of the business will be liable for not paying tax as a company and not as an individual.

According to Aloyo, there are two types of taxes that one must familiarise with; direct tax and statutory (indirect tax.)

Under the banner of direct tax comes the commonly known deduction such as excise duty, custom duty and levies and Value Added Tax (VAT).

On the other hand, there is statutory tax. This is the tax imposed by law on taxable income that falls within a given tax bracket. They include PAYE, Corporate tax, custom and excise duty, and withholding tax.

PAYE

PAYE is one of the many statutory taxes in Kenya collected from individuals engaged in gainful employment. Under this, the employers make a deduction of a particular percentage from the salary.

Custom Duties

These include import duties such as excise duty, VAT, import declaration fee and railway development levy. Custom duties are charged to the importer of the goods at the point of importation. The importers are required to accurately calculate and pay the taxes based on the applicable charges.

Generally, when goods are imported VAT, import duty, excise duty, import declaration fee, railway development fee, raw material, intermediate goods and finished goods are applied.

Withholding Tax

These are one of the many taxes in Kenya and are charged on interests, dividends, pensions, performance fees, royalties, commissions and so on. However, the rates of the taxes collected are not fixed. They vary according to the status of the payer. That is whether or not he/she is a resident.

Corporate Tax

Under this tax, companies operating in the country pay a charge on their total income to the government. The indigenous companies have to pay a change of 30 percent while branches of non-resident companies are charged 37.5 percent on their taxable profits.

In 2020, the government introduced Turnover Tax (TOT) for small businesses wishing to operate in the country. TOT is basically a tax charged on gross sales of a business as per Sec. 12(c) of the Income Tax Act.

TOT is payable by resident persons whose gross turnover from business is more than Ksh1,000,000 and does not exceed or is not expected to exceed Ksh50,000,000 in any given year.

A file image of the National Treasury

The National Treasury offices at Harambee Avenue, Nairobi

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