What is Minimum Tax?
Minimum Tax was introduced in Kenya through the Finance Act 2020, and is outlined under Section 12D of the Income Tax Act (CAP 470). It is charged at a rate of 1% of a business’s gross turnover, and it applies regardless of whether the business makes a profit or a loss.
This tax came into effect to address a common loophole where businesses continuously declare losses, avoiding any tax liability while remaining operational.
Why Was Minimum Tax Introduced?
Under traditional taxation, income tax is only payable on profits. However, when a business declares a loss, it pays no taxes, and the losses are carried forward to future periods. Over time, some businesses repeatedly report losses, contributing nothing to the tax pool.
Minimum Tax ensures equity by making sure all operational businesses contribute, even if they post accounting losses. It helps broaden the tax base and distribute the tax burden more fairly.
Does Minimum Tax Lead to Double Taxation?
A common concern is whether Minimum Tax causes double taxation, especially for businesses already paying instalment tax. This is not the case.
- If instalment tax is higher than Minimum Tax → pay instalment tax.
- If Minimum Tax is higher than instalment tax → pay Minimum Tax.
The tax works as an alternative, not an additional obligation.
When and How Is Minimum Tax Paid?
Minimum Tax is paid in four instalments during the year of income:
- 20th April
- 20th June
- 20th September
- 20th December
These dates apply if the accounting year ends in December. The tax is computed based on gross turnover, and payments must be made via iTax.
At year-end:
- If total tax liability > instalments and Minimum Tax → pay the balance of tax within four months after the year ends
- If liability < Minimum Tax or the business made a loss → Minimum Tax already paid is final
Who Is Exempt from Minimum Tax?
Not all income is subject to Minimum Tax. Exemptions include:
- Income listed in the First Schedule of the Income Tax Act
- Employment income
- Residential rental income
- Income subject to Capital Gains Tax
- Income under Turnover Tax (TOT)
- Income from the extractives sector
These exclusions ensure that Minimum Tax only applies to specific business categories.
Final Thoughts
The introduction of Minimum Tax is a strategic move to expand Kenya’s tax base. It ensures that every business contributes to national revenue, creating a fairer and more balanced tax system.
While it may affect businesses that consistently report losses, it promotes compliance, discourages tax avoidance, and ensures a more equitable distribution of the tax burden across the economy.
