Withholding tax is a system of collecting tax whereby a party making payment of certain income is required to withhold tax at a specified rate. The Tax withheld has to be remitted to KRA by 20th Day of the month following the month in which the tax was deducted. Late payment of withholding tax attracts a 20% penalty. Note, withholding tax does not require registration, all persons making payment of income subject to withholding tax must withhold.
The I-tax system auto generates a withholding tax certificate which is send to the I-tax account and email of the income recipient. At the end of the year of income while filing tax returns, the income recipient is required to declare the gross income alongside other incomes but claim a deduction (tax credit) for the tax withheld.
For instance, if a professional offers services for Sh. 1000,000 at withholding tax rate of 5%, the service recipient will deduct and remit Sh. 50,000 meaning this professional will receive Sh. 950,000 and a notification for the Sh.50, 000 deducted. While filing tax returns for the year, this professional shall be required to declare the gross amount Sh.1000, 000 calculate tax on it at the appropriate rates (graduated scale for individuals, 30% for a company) but deduct the Sh. 50,000 already withheld to arrive at the net tax payable.
The service recipient must subject the amounts payable to withholding tax. The payments happen to be expenses, which will not be allowed as deductions if they have not been subjected to withholding tax. Further failure to withhold tax attracts a penalty, 10% of the amount involved. The recipient must declare the income that has already been subjected to withholding tax since that is already captured on the I-tax system.
Note: There are certain cases where withholding tax is final, for example dividend payable to resident persons and on interest income payable to individuals. In such few cases, the income is not subject to further taxation hence should not be declared while file personal tax returns.
Click this link for details on incomes subject to withholding tax and rates
https://taxdon.co.ke/withholding-tax-rates/
This information applies to income tax, refer to income tax act CAP 470, chapter 35 for further details. Read our next article on withholding VAT