All You Need to Know About Turnover Tax (TOT) 

KRA has, in recent years, intensified its focus on self-employed individuals and small businesses as it seeks to improve revenue collection and enhance tax compliance.

With enhanced monitoring through platforms such as iTax and eTIMS, small businesses are increasingly under scrutiny to ensure they are paying the correct taxes.

One of the impactful tax regimes affecting small businesses and companies is Turnover Tax (TOT), yet many traders, shop owners, consultants, online sellers, and small contractors either misunderstand how it works or are unsure whether it applies to them.

TOT is specifically designed to simplify taxation for small businesses by reducing paperwork and making compliance easier.

Here is everything you need to know about Turnover Tax.

Also Read: All You Need to Know About Withholding Tax Amid KRA Crackdown

What Is Turnover Tax (TOT)?

Turnover Tax (TOT) is provided for under Section 12C of the Income Tax Act (Cap 470), and is a tax charged on resident persons (individuals or companies) carrying on business in Kenya whose gross annual revenue (not profit) is more than Ksh1 million but not exceeding Ksh25 million.

Businesses earning below Ksh1 million annually are not eligible for TOT.

Unlike corporate income tax, which is calculated on profits after deducting expenses, Turnover Tax is charged directly on gross sales. This means it is based on total revenue before expenses. Therefore, you cannot deduct rent, salaries, transport, stock purchases, electricity costs, or any other business expenses.

ToT is charged at 3% of gross sales, effective from 1 July 2023, as per the Finance Act 2023.

For example, if your business makes Ksh1,000,000 in a given month, your Turnover Tax will be Ksh30,000. However, if your total annual sales exceed Ksh25 million, you are required to exit the TOT regime and register under the applicable income tax provisions.

Also Read: KRA to Verify Tax Returns Filed by PIN Holders

Who Is Eligible for Turnover Tax?

An individual or a company doing business in Kenya qualifies for Turnover Tax if their annual gross turnover is more than Ksh1 million but does not exceed Ksh25 million.

ToT is optional; just because you qualify does not automatically mean you will be obligated to pay ToT. 

However, once a taxpayer opts into TOT, they can only exit by giving a written notice to the Commissioner and obtaining approval. 

Once approved to opt out, the taxpayer will be subject to income tax under the normal provisions and may not revert to TOT without meeting the prescribed conditions.

Additionally, if a TOT-registered business makes taxable supplies and its turnover reaches Ksh5 million or more within a 12-month period (actual or expected), it must also register for VAT. This means such a business will be required to comply with both VAT and TOT obligations.

Not all income qualifies under the Turnover Tax regime. TOT does not apply to:

• Rental income
• Professional or consultancy services
• Income subject to final withholding tax (such as qualifying dividends and qualifying interest)
• Income derived by non-residents
• Income from businesses engaged in mining, petroleum, insurance, or certain financial services
  The classification of income depends on the nature of the activity carried out.

Also Read: KRA Changes the Process of Filing Taxes for Salaried Individuals; How It Will Work

Benefits of Turnover Tax

1. Reduced Record-Keeping Burden

TOT only requires records sufficient to determine your total sales, no need to keep full profit-and-loss accounts.
Unlike Corporate Income Tax, you don’t need:

• Detailed expense classification
• Capital allowance computations
• Tax adjustments
• Profit reconciliation schedules

2. Simplified Filing and Payment

Returns are filed online through the iTax platform. Payments can be made via partner banks or through M-Pesa.

3. Faster Compliance

The simplified structure reduces the time spent on tax calculations and paperwork.

4. Final Tax

Turnover Tax is a final tax on business income taxed under the TOT regime. However, a taxpayer may still be required to file an annual income tax return if they have other sources of income, such as employment income, rental income, or other taxable income not covered under TOT.

How to Register for Turnover Tax

1. Log in to iTax using your PIN and password.
2. Click on the “Registration” module and select “Amend PIN details.”
3. Under Section A (Basic Information), select “Yes” under the question asking if you want to register for TOT.
4. Under Section B (Obligation Details), select the date of registration for TOT.
5. Submit the application.

Once approved, your PIN will reflect Turnover Tax as one of your tax obligations.

Filing and Payment Deadlines of Turnover Tax

A person subject to ToT must file a monthly return and pay the tax due. This must be done on or before the 20th day of the month following the end of the tax period.

To file:

1. Log in to iTax.
2. Under the “Returns” menu, select “File Return.”
3. Choose Turnover Tax and download the Excel return form.
4. Complete and upload the return.
5. After filing, go to the “Payment” menu and generate a payment slip.
6. Pay through a partner bank or via M-PESA.

Failure to meet the deadline attracts penalties.

• Late filing penalty: Ksh1,000 per month.
• Late payment penalty: 5% of the tax due.
• Interest on unpaid tax: 1% per month until fully paid.