Tax advisory firm Andersen has called for a reduction in the proposed penalties for non-compliance with the electronic Tax Invoice Management System (eTIMS) to Kes500,000 from Kes2 million.

While appearing before the House Committee on Finance and Budget on the third day of public hearings, Andersen argued that the proposed Kes2 million monthly penalty for small and medium-sized enterprises (SMEs) is excessively punitive.

Instead, they recommend a more manageable Kes500,000, a proposal aimed at fostering compliance without imposing undue financial strain on small businesses.

The Finance Bill 2024 includes amendments to Section 59A of the Tax Procedure Act, mandating that businesses integrate eTIMS for the electronic submission of tax documents. Non-compliance with these requirements, according to the Bill, would result in a penalty not exceeding Kes2 million for every month of continued failure.

Andersen told the Kuria Kimani-led team that such a hefty penalty is counterproductive, particularly for SMEs that may struggle with the costs and technical challenges of implementing eTIMS.

According to the advisory company, most firms providing value-added tax (VAT) services are already compliant with eTIMS requirements, making the severe penalties unnecessary and excessively punitive.

They argue that penalties should serve as a deterrent to non-compliance and encourage adherence to tax regulations, rather than crippling small businesses that form the backbone of Kenya’s economy.

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The proposed Kes2 million fine, Andersen adds, could result in irrecoverable financial damage to SMEs, potentially leading to closures and job losses. Further, the firm explained that the taxman can still enforce compliance without risking the financial health of small businesses and that compliance should be encouraged through supportive measures rather than punitive ones.

For instance, they offered that the government should consider offering technical assistance and resources to help SMEs integrate eTIMS seamlessly, thereby ensuring higher compliance rates and better working relationships between tax authorities and investors.

The committee was also asked to reconsider the proposed taxation of the income or principal sum of registered family trusts. The advisory firm noted that family trusts are a vital tool for real estate and succession planning and are currently exempt from certain taxes. Taxing these trusts, Andersen noted, will undermine their purpose and discourage their use.

Currently, the income of a trust is taxed upon distribution. Andersen proposed maintaining this system, which ensures that taxes are collected without discouraging the establishment of family trusts as they safeguard family assets while supporting long-term financial planning.

Meanwhile, Ernest and Associates, another tax advisor echoed Andersen’s concerns during their presentation to the committee.

CPA Ernest Muriu argued against introducing new tax proposals that would increase the tax burden on businesses without public participation debate. He suggested that such proposals be introduced through a Tax Laws Amendment Bill, allowing for comprehensive review and input from stakeholders.

Muriu highlighted that aligning tax policy changes with constitutional principles of public participation would yield more equitable tax legislation.

Articles 201(a), 10(2)(a), and 118(1)(b) of the Constitution advocate for an inclusive and transparent policy-making process, a principle that should guide any changes to the tax laws.

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