Small and Medium Enterprises (SMEs) are arguably the backbone of the Kenyan economy. They contribute a considerable percentage to the country’s GDP through taxes. Furthermore, they drive the economy through employment and innovation. But what kind of taxes do SMEs pay in Kenya?
SME taxes in Kenya are categorized into two primary types: annual and monthly. Currently, the annual tax is company income tax, also known as corporation tax. The rest of the taxes are monthly and they include Pay As You Earn (PAYE), Turnover Tax (TOT), Value Added Tax (VAT), withholding tax, and excise duty. We will focus on the annual SME taxes in this guide. Keep reading to understand the annual tax return filing in Kenya for small and medium businesses.
Understanding Annual SME Taxation in Kenya (Corporation Tax)
The Income Tax Act of Kenya mandates taxation of a company’s annual profits. This tax is called company income tax or corporation tax. SMEs are legally required to pay corporation tax to the Kenya Revenue Authority at the end of a financial year. The tax rates for the corporation tax are divided into two categories:
- Resident businesses/companies are taxed at the rate of 30% of annual profits
- Non-resident (Foreign) businesses/companies are taxed at the rate of 37.5% of annual profits
This tax is payable annually, on or before the 6th month after the end of a tax period. For example, the corporation tax for the January 2024 to December 2024 accounting year is payable between January 1st, 2025, and June 30th, 2025.
Eligibility
Not all SMEs are eligible for the corporation tax. The following are exempt from paying and filing this tax:
- Sole proprietorships- The sole proprietor pays income tax under individual income tax.
- Export Processing Zones (EPZs).
- Partnerships- their income tax is paid through the partnership return.
Penalties for Corporation Tax Non-Compliance
Failure to pay and file the corporation tax returns attracts penalties and interest. These are:
- Penalty for late filing: 5% of the tax due or Ksh. 20,000, whichever is higher.
- Interest for late tax payment: 1% of the overdue tax per month, until the debt is cleared.
Annual Tax Return Filing for SMEs: Step-by-Step Process
Here’s the step-by-step guide to filing your annual corporation taxes as an SME:
Step 1: Prepare Relevant Documents
Before you commence the annual tax filing process, make sure you have all the relevant records and documents needed to validate a corporation tax return. These include:
- Sales and purchase invoices
- Financial statements
- Business KRA PIN
- Payroll records
- Contracts and agreements
- Bank statements
Step 2: Log in to the iTax Portal
Corporation tax returns are done online via the iTax portal. Go to the iTax portal on your web browser. Log in to your business account using the KRA PIN and password. Navigate to Returns and select File Returns. Select the Type of Tax Return (Non-Individual) and Tax Obligation (Income Tax-Company), and then click Next to go to the following page.
Step 3: Download and Fill the Income Tax Company Return Form (IT2C Form)
Click on the provided link to download the IT2C form onto your computer. Access the Excel sheet on your computer and enable editing. Read the instructions carefully before filling out the form.
Fill the Excel return form as required, including return information, bank details, auditor details, profit/surplus/loss details, and paid installments details. Be careful to avoid errors. If you make errors, you’ll see them under the red-coloured Errors section. Once all the details are accurately filled, click Validate. The form will be saved as a zip file.
Step 4: Upload the Completed Income Tax Company Return Form
The next step is to upload the completed IT2C form you filled out in the above step. Locate the zip file in your documents and upload it as directed on the portal.
Check the I Agree to the Terms and Conditions box.
Step 5: Submit the Return Form
Click Submit to turn in the form to KRA.
Step 5: Receive Return Acknowledgement Receipt
KRA will receive your annual tax return. The system will autogenerate an acknowledgment receipt. Download the receipt using the provided link.
Step 6: Tax Payment
Click Payment to proceed to the tax payment step. Generate the payslip and make the required payment. Payments can be done through:
- KRA-endorsed banks
- MPESA
Note: If the annual tax liability is projected to exceed Ksh. 40,000, you are required to pay the tax in installments, a mode of payment known as Installment Tax on iTax.
What is Installment Tax in Corporation Tax?
As the name suggests, installment tax is corporate tax paid in installments. Instead of paying a lump sum at the end of the tax period, the company/business is required to make partial payments in four equal installments.These installments are paid in advance, before the business accounts are prepared. Therefore, the installments are based on the estimated profits. But how are the installment taxes calculated? Installment tax is computed in two ways. These are:
- Based on the previous year (Prior year basis). Tax payments from the previous year are multiplied by 110%.
- Based on estimated profits of the current year (current year basis).
Note: Not all SMEs are eligible to pay installment tax. Sole proprietorships, those whose estimated annual profit is below Ksh. 40,000, and persons subject to the turnover tax (TOT) aren’t eligible for installment tax.
Installment Tax Rates
The installment tax rate is 25% of the profits leading up to the provided payment schedule. The payment schedules are:
- 20th day of the 4th month
- 20th day of the 6th month
- 20th day of the 9th month
- 20th day of the 12th month
Note: For companies in the Agricultural sector, the installments are paid in two payment schedules, 20th day of the 9th month and 20th day of the 12th month. The first three installments are combined and paid in the 9th month.
Company Income/Corporation Tax Tips for SMEs
Follow these tips to ensure tax compliance and avoid penalties, interests, and other repercussions from KRA as an SME:
- Understand your tax obligations: SMEs in Kenya have several tax obligations, including annual and monthly taxes. Knowing which taxes you’re expected to pay helps you stay compliant.
- Maintain accurate records: Lack of accurate records is a recipe for disaster when it comes to taxes. Discrepancies can cast doubts on your taxable income. Ensure your sales and purchase invoices, financial records, bank statements, and payroll records are accurate and transparent.
- Take advantage of tax incentives and reliefs: Leverage every tax-saving opportunity that is presented to you, either through KRA incentives or reliefs.
- Respond to KRA queries and audits: KRA may ask queries or request tax audits if your taxes show some discrepancies. Accord them the support they need and provide all required documents and records.
- Stay up to date with Kenyan tax laws, especially those about SMEs: Keep up with tax changes and new laws pertaining to SMEs.
- Work with Tax experts: Navigating tax returns and payments for SMEs is not an easy feat. Simple errors can cost you, leading to KRA penalties. Seeking the help of a professional tax consultant saves you time and the headache that comes with annual tax return filing in Kenya.
Simplify Your Annual Income Tax Return Filing
Are you a business owner looking to stay compliant with Kenyan tax laws? At Gichuri & Partners, we simplify your annual income tax return filing to give you peace of mind and help you stay compliant. Our expert team will handle your tax returns so that you can focus on important matters like building your business. We also provide accounting, bookkeeping, payroll management, and audit services to maintain accurate records, which in turn simplifies filing taxes. We are your trusted partner in tax and accounting services!
