Value Added Tax (VAT) is a tax on the value added at each stage of production, allowing businesses to deduct VAT paid on inputs, whereas a turnover tax is a fixed-rate tax on gross sales, causing "tax cascading" because it is levied on the total revenue without deductions. VAT is generally more efficient, while turnover tax is simpler and often used for small businesses.
The government levies taxes on all goods and services that are provided. This is referred to as turnover tax (also known as VAT or, in Dutch, BTW). At the moment, the highest rate is 21% and the lowest 9%.
A turnover tax is similar to VAT, with the difference that it taxes intermediate and possibly capital goods. It is an indirect tax, typically on an ad valorem basis, applicable to a production process or stage. For example, when manufacturing activity is completed, a tax may be charged on some companies.
What is the main difference between Turnover Tax (TOT) and Value Added Tax (VAT) in Kenya? TOT is a flat 1% tax on a business's gross monthly turnover, while VAT is a 16% tax (or 8% for specific goods) on the value added at each stage of production and distribution.
Turnover is calculated after VAT is deducted from income. VAT is not considered part of your business income. In order to get an accurate picture of the turnover of your business you need to exclude VAT from your sales total. Your gross profit/turnover does not include other tax liabilities.
Turnover Tax is a tax charged on businesses whose gross turnover is more than Kshs. 1,000,000 but does not exceed or is not expected to exceed Kshs. 25, 000,000 during any year of Income. TOT is chargeable under Section 12 (C) of the Income Tax Act (CAP 470).
Value-added tax
You must register your business for VAT if the total value of your goods and services in any consecutive 12-month period exceeds or is likely to exceed R1 million.
Navigating VAT obligations can be particularly complex for online businesses, especially those selling across borders. Common mistakes—such as failing to register in the correct countries, applying the wrong VAT rates, or missing important filing deadlines—can lead to serious financial and legal consequences.
To figure out the total price with VAT, simply multiply the original price by 1.12. To figure out how much VAT you'll be charging, simply multiply the original price by 0.12.
One of the disadvantages of turnover tax is that a business operating at a loss will still have to pay turnover tax (Visser, 2009). Under the income tax system, no tax is payable when businesses are operating at a loss. The assessed loss can then also be utilised against the first profits of the business.
Turnover tax is reserved for micro businesses with a “qualifying turnover” of less than R 1 million for the financial year. “Qualifying turnover” is the total amount received by a business for the year of assessment from carrying on business activities.
Sometimes a client pays an invoice only partially or not at all. In that case, the entrepreneur has paid too much turnover tax, because the tax was calculated on an amount that was never fully received. The law allows these excess payments to be reclaimed.
This tax is typically calculated as a percentage of the total transaction value when securities, such as stocks and bonds, are bought or sold. The purpose of this tax is to generate revenue for the government and regulate trading activities in the financial markets.
Not all sales are liable to VAT. Some traders are not registered for VAT because their businesses have sales (turnover) below the VAT registration threshold and so they cannot charge VAT on their sales (unless they decide to register voluntarily – see the heading below: Voluntary registration).
Types of VAT
If your taxable turnover is below the threshold and you're not voluntarily registered, you don't need to charge or collect VAT. This applies whether you're a sole trader or a limited company. VAT registration is based on turnover, not your legal structure.
Many businesses prefer to buy their inputs from businesses in the VAT system so they can claim credits on the tax they pay. As a result, countries allow small businesses to register for the VAT even if they are not required to do so.
Products that shouldn't be taxed are considered to be exempt from VAT. Businesses, charities, and other types of organisations can also be considered to be exempt from VAT. A business is VAT-exempt if they only sell VAT-exempt products, or if they're not involved with taxable 'business activities'.
A VAT rate is the percentage a business or consumer pays in tax according to the cost of the product, service, or process at that particular point in the supply chain. Rates differ depending on the standards set by independent governments, but EU members are subject to standard minimum VAT rates.
By providing a credit for taxes paid, the VAT prevents cascading. Last, when retailers evade sales taxes, revenues are lost entirely. With a VAT, revenue would only be lost at the “value-added” retail stage. All these differences help explain why numerous countries replaced their sales and turnover taxes with VATs.