We have been told many times: File Annual Tax Returns And Retain Your Wealth, is this statement correct? All taxpayers in Kenya are expected to file annual tax returns by the end of the last day of the sixth month after the year-end. All individual and non-individual taxpayers whose year of income is from January to December in Kenya are required to file annual tax returns by the last day of June, the following year.
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Failure to file the tax returns attracts a fine, currently kshs 20,000 (200 US dollars @ kshs 100 per dollar).
The tax relationship
In the tax relationship, there is the government and the taxpayer. The government receives tax while the taxpayer contributes (sometimes collects on behalf) the tax.
The government has the role to ensure that the country remains a country where the citizens are free to go about their daily chores unhindered.
For that, the government requires money. Since the government has limited sources of money, people must contribute.
The government enters into a contract (implied) with the people for the provision of various services and for that the people must contribute. The contribution is in the form of taxes.
The taxpayer is required to occasionally inform the government what they have been doing (tax-wise), the amount of tax they were expected to pay and whether they paid the tax or not and on time.
Why file tax returns
A taxpayer’s tax year is twelve (12) months apart from the first year where the reporting is done after eighteen (18) months after commencement of the business.
Every taxpayer has an implied agreement with the government that for income tax purposes, the taxpayer will report all their tax activities for one year (twelve months) of income to the government.
Simply put, making a tax return is informing the government about the taxes that should have been paid and whether the taxes were paid or not during the year of income.
The taxpayer is reporting their tax activities.
Income subject to tax
According to Income Tax Act Cap 470, income that is derived or accrued in Kenya is subject to income tax in Kenya. It is important to remember that Kenyan taxpayers are taxable on their worldwide income.
The taxable income is such income as from employment, business, investments, rent etc.
Types of Tax Returns
There are various types of tax returns. However, we can put tax returns into four types.
A debit tax return
In this type of tax return, once the taxpayer has completed the tax returns, they find that there is tax to pay. This means that the taxpayer did not pay all the taxes they were supposed to pay during the year of income.
The taxpayer should promptly pay the tax debt to avoid paying extra tax penalties and interest.
A credit tax return
On completing the tax returns, the taxpayer realizes that they paid more tax than they were expected to pay. The taxpayer should instruct the Commissioner what to do with the overpayments.
The tax overpayments can be refunded as cash, it can be utilized to pay off other current tax debts or it can be utilized to pay any future taxes.
A zero tax return
When the taxpayer completes the tax returns, they find that all the total deductible expenses were equal to the total taxable income that was derived and accrued from Kenya or elsewhere during that year of income.
Therefore, the taxable income is zero and the tax payable is zero. Hence, there is no tax to pay.
A nil tax return
This is a situation where the taxpayer has no tax to report. The taxpayer did not “accrue or derive” any income from Kenya. Many taxpayers file genuine nil tax returns such as students, people who migrated from Kenya and have no income from Kenya, unemployed people such as the youth, housewives or househusbands etc.
Some people decide they will file false tax returns.
Before filing a nil return, one should familiarize themselves with the new nil tax return form released by KRA in April 2018. Only those who do not have taxable income or do not reach the threshold of taxable income are expected to file nil annual tax returns.
KRA is later expected to confirm the status of the nil filer from their transactions using PIN such as bank details, Mpesa, electricity bills etc.
Non-compliance
Currently, those who fail to file annual tax returns are subjected to a fine of kshs 20,000 (200 US $). Also, if there is any tax that was due but was not paid, the taxpayer will pay penalties and interest.
Wealth Forgone
To some people, kshs 20,000 may not be a lot of money but this is a lot of money. Why? Because this is money a taxpayer will lose because of not sparing a few hours to file the tax returns. But is this real wealth? Yes, it is. How?
Consider there are millions of people in this world who have never had kshs 20,000 in their lives. Others will spend their whole life and will never have such kind of money. Millions labour a whole month and they do not earn the kshs 20,000.
Still not convinced?
On a good day, if you take kshs 20,000 and buy 1,000 tree seedlings at kshs 20, in five or six years you may sell the trees for example at kshs 1,000 and that will give you kshs 1000,000 before deducting any costs.
There are very many other things that one can do with kshs 20,000.
Let us imagine for arguments sake that 2,000,000 people in Kenya will not file tax returns before end of June, that will be kshs 20,000 x 2,000,000 which is kshs 40,000,000,000 (400,000,000 US$ @ ksh 100 per dollar).
This is the money that the government stands to collect as fines for failure to file annual returns. This is wealth foregone. This is money denied people and this makes people poorer.
File your annual tax returns and retain your wealth. The deadline for filing tax returns is the last day of June and it is quickly approaching.
Thank you for reading the article.
Dr. Wakaguyu Wa Kiburi.
