You’ve just registered your business at Sheria House or online via eCitizen. The hustle is real, and the first sales are trickling in. But now your accountant is talking about taxes, and you’re stuck between two options: Turnover Tax (TOT) or the normal Income Tax.
Which one is for you? Picking the wrong one can mean paying too much or facing penalties from KRA. This guide cuts through the legal jargon and gives you the straight talk on TOT vs Income Tax, so you can make a smart choice for your Kenyan business.
What is Turnover Tax (TOT) in Simple Terms?
Think of Turnover Tax (TOT) as the “simplified” tax option for small businesses. It’s a tax on your total gross sales (your turnover), not your profit. You pay it whether you made a profit or a loss that month. It’s designed for the mama mboga, the small hardware owner in Kitengela, or the freelance graphic designer in Westlands whose business is still growing.
The current TOT rate is 3% of your monthly gross sales. You must file and pay it by the 20th of the following month. The key thing? Your annual turnover must be between KES 1 million and KES 50 million to qualify. Below KES 1m, you’re exempt. Above KES 50m, you must graduate to Income Tax.
Who Qualifies for TOT in Kenya?
Not every business can opt for TOT. KRA has clear rules. You qualify if:
- Your annual turnover is between KES 1 million and KES 50 million.
- Your business is not a corporation (limited company). It’s for sole proprietors and partnerships.
- You are not in a profession like medicine, law, or architecture.
- You are not in the rental business or management services.
- Your goods are not exempt from VAT (like most basic food items).
If you run a small retail shop, a salon, a mitumba business, or a consultancy that falls within the turnover bracket, TOT could be your lane.
Normal Income Tax for Businesses
This is the main tax system. Instead of taxing your sales, Income Tax is charged on your profit (your income minus all your allowable business expenses). It’s more complex but can be cheaper if your expenses are high. It’s for established businesses, companies, and professionals.
For individuals and partnerships, you pay income tax at graduated rates (from 10% to 30%). For resident companies, it’s a flat rate of 30% of their taxable profit. You file annually, though you make advance payments based on your estimates.
Key Differences: TOT vs Income Tax at a Glance
Let’s make this crystal clear. Here’s the head-to-head comparison:
- What’s Taxed: TOT taxes your GROSS SALES. Income Tax taxes your NET PROFIT.
- Tax Rate: TOT is a flat 3%. Income Tax ranges from 10%-30% for individuals or 30% for companies.
- Filing: TOT is monthly. Income Tax is primarily annual (with instalments).
- Complexity: TOT is simple—just calculate 3% of sales. Income Tax requires proper bookkeeping to track all expenses.
- Expenses: With TOT, you CANNOT deduct business expenses. With Income Tax, you CAN and MUST deduct them to find your profit.
Turnover Tax vs Income Tax: Which One Saves You More Money?
This is the million-shilling question. The answer? It depends entirely on your profit margin.
Do a quick calculation. If your business expenses are low and your profit margin is high (say, 40% or more), TOT at 3% of sales might be cheaper than paying 30% on your profit. But if your expenses eat up most of your sales—like a transport business with high fuel and maintenance costs—then Income Tax on your smaller profit will likely be the better deal.
Simple Rule of Thumb: If your annual expenses are more than 90% of your turnover, Income Tax is almost always better. If your expenses are less than 90%, you need to crunch the numbers. Don’t guess—calculate!
The Kenyan-Specific Section: Navigating KRA, Seasons, and Local Nuances
Understanding the theory is one thing. Applying it in the Kenyan context is another. Here’s what you need to know on the ground.
First, the authority is KRA. All this is governed by the Tax Procedures Act and administered through the iTax platform. You cannot just “choose.” You must apply for TOT on iTax if you qualify, and KRA can move you to Income Tax if your turnover exceeds the limit.
Think about Kenyan business seasons. A hardware supplier in Mai Mahiu might have booming sales during the long rains (March-May) due to construction and repairs. Under TOT, their tax bill shoots up in those months, even if their profit margin stays the same. An ice cream shop in Mombasa will see seasonal spikes in turnover during the hot, dry season. With TOT, you feel these fluctuations directly in your tax payment.
Local Tip: Many small suppliers at places like Eastleigh’s Garissa Lodge or Kamukunji might operate on cash and fear formalization. But here’s a practical tip: if you’re a small retailer, using a simple M-Pesa business till or even a dedicated line to track daily sales makes calculating your TOT liability at month-end a breeze. It also creates a digital trail that can help you access credit from SACCOs later. KRA is increasingly integrating with payment systems, so getting your records straight early saves you a major headache during a tax audit.
How to Switch Between TOT and Income Tax
Your business isn’t static. What if you start small on TOT and grow? Or realize Income Tax is better? You can switch.
- From TOT to Income Tax: This happens automatically if your turnover exceeds KES 50m for two consecutive years. You can also voluntarily opt out by notifying KRA.
- From Income Tax to TOT: You must apply on iTax and prove your turnover will be within the KES 1m-50m bracket. If you were previously on Income Tax, KRA will scrutinize this closely.
Remember, you must inform KRA. Don’t just stop filing one and start the other. That’s a direct ticket to penalties and interest.
Common Pitfalls to Avoid with Kenyan Business Taxes
Don’t learn these lessons the hard way. Here are the classic mistakes Kenyan business owners make.
- Underestimating Turnover: “Hii business haina pesa,” you say, but your M-Pesa statements show sales of KES 1.2 million. KRA’s data matching will catch you. Be honest from the start.
- Ignoring iTax Notifications: When KRA sends an alert to your iTax dashboard, act on it. Burying your head in the sand like an ostrich won’t make it go away. Those penalties compound daily.
- Mixing Personal & Business Money: This makes calculating true turnover or profit a nightmare. Get a separate business line for M-Pesa and a dedicated bank account, even if it’s a simple savings account from your mobile bank.
- Forgetting Other Taxes: TOT or Income Tax isn’t the whole story. You may still need to think about VAT (if turnover > KES 5m per year), Withholding Tax, and even NSSF/NHIF for yourself and employees.
Your Next Steps: Getting This Sorted
Enough reading. It’s time to act. Here’s your action plan for this week.
- Pull Your Numbers: Review your last 12 months of sales (M-Pesa statements, bank slips, invoice books). What’s your true turnover?
- Calculate Profit Margin: For the same period, list all business expenses (rent, stock, boda deliveries, airtime). Find your average profit margin.
- Do the Math: Compare 3% of your turnover vs 30% (or your applicable rate) of your profit. Which is lower?
- Log into iTax: Check your current status. If you need to apply for TOT or change your tax obligation, start the process online. If it’s too complex, invest in a reputable local accountant in your town. The fee of maybe KES 5,000-10,000 per year can save you ten times that in overpaid taxes or penalties.
Final Verdict on Turnover Tax vs Income Tax
Choosing between Turnover Tax and Income Tax isn’t about finding a loophole; it’s about picking the right, compliant path for your business’s current size and model. For the small, high-margin hustle with straightforward sales, TOT offers beautiful simplicity. For the business with significant costs, employees, and growth ambitions, the standard Income Tax system, though more complex, is the necessary and often cheaper route.
The worst thing you can do is ignore it. Tax obligations are part of the business journey in Kenya. Getting it right from the start gives you peace of mind, keeps KRA off your back, and lets you focus on what you do best—growing your venture. Now, go log into iTax and check your status. Got a question or a tip from your own experience? Share it in the comments below to help another hustler out.