In the context of Kenya's evolving financial and tax regulations, Micro, Small, and Medium Enterprises (MSMEs), particularly family-owned businesses, must navigate a complex landscape to maximise profits and access tax relief effectively.
6 ways family-owned businesses can maximise profit & access tax relief
Kenyan MSMEs, particularly those that are family-owned, can navigate the complexities of the tax landscape, optimise their tax liabilities, and enhance their profitability in a compliant manner.
A group of business owners in a meeting [Image Credit: Monstera]
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The Finance Act, 2023, has introduced several key legal and financial mechanisms that these businesses can leverage.
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Here's a comprehensive analysis based on the latest information, including strategies for tax relief and profit maximisation:
1. Amendments to Turnover Tax (TOT)
The Finance Act, 2023, has lowered the upper threshold for TOT from Sh50 million to Sh25 million and increased the rate from 1% to 3%.
This move aims to expand the tax base by including more medium enterprises under the TOT regime, while those above the threshold must apply a 30% income tax to their taxable income.
MSMEs need to reassess their financial planning and tax obligations to ensure compliance and optimise their tax positions.
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2. Taxation of digital assets and digital content monetisation
A notable inclusion is the imposition of a 3% tax on income derived from the transfer or exchange of digital assets, including cryptocurrencies and non-fungible tokens (NFTs), effective from September 1, 2023.
NFTs
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Additionally, income from digital content monetisation is subject to withholding tax at 5% for residents and 20% for non-residents.
Businesses engaged in these activities should incorporate these taxes into their pricing and financial models to maintain profitability.
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3. Tax relief for employment and investment
The Finance Act provides tax relief on employment income in certain conditions, such as payments for travel allowances based on standard rates and certain employer contributions being treated as a benefit.
It also introduces incentives for investing in human vaccines manufacturing and special economic zones, offering reduced tax rates and exemptions on specific income types.
These incentives present opportunities for family-owned businesses in these sectors to reduce their tax liabilities and enhance profitability.
4. Electronic Tax Invoice Management System (e-TIMS)
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With effect from 1st January 2024, any expenditure or loss will not be deductible if the invoices of the transactions are not generated from e-TIMS.
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This change underscores the importance of adopting compliant digital invoicing systems, which can also enhance operational efficiencies and reduce the risk of non-compliance penalties.
5. Exportation of services and VAT adjustments
The Act makes the exportation of services taxable at 0%, aligning Kenya's VAT treatment on the export of services with international norms.
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Additionally, VAT on petroleum products has been increased from 8% to 16%, except for LPG gas which is zero-rated.
These adjustments necessitate a review of pricing and financial strategies, especially for businesses in the export services sector, to leverage the tax benefits.
6. PAYE tax bands
New PAYE tax bands have been implemented, affecting employment income taxation.
Businesses must adjust payroll systems accordingly and consider the impact on overall employee compensation and benefits strategies.
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For effective implementation of these strategies, MSMEs should focus on maintaining accurate financial records, utilising digital tools for tax compliance (such as e-TIMS), and staying informed about regulatory changes.
Engaging with tax professionals and leveraging digital financial platforms can enhance compliance and strategic planning. Moreover, evaluating financial metrics and performance indicators, such as cash flow, profit margins, and tax savings, will be crucial in assessing the success of these strategies.
This content was generated by an AI model and verified by the author.
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