The newly introduced minimum tax raises two contrasting perspectives to business losses. The opponents of this tax argue against taxing losses while the proponents argue that “losses” have to be taxed.
What’s new with minimum tax? Businesses are now charged to tax on gross receipts at a marginal rate of 1%. Businesses are normally taxed on their profits. That option still exists provided the tax on profits are more than tax on gross receipts. Taxing businesses on profits has always left loss making entities off the hook. Bear in mind that the onus of determining profits or losses rests on the taxpayer.
Here comes the argument by the opposing side, that the new taxes will ruin loss making entities. In my view there are three types of loss making entities to address here. First are businesses reporting losses but are flourishing by any other standard. How do they survive successive periods of loss making? They know, we know, the tax man seems to have known, they are the targets of this new tax.
Second category are businesses in capital intensive sectors and volatile environments like mining. The drafters of this law seem to have had this spirit by exempting the extractive industry. In other jurisdictions like Tanzania they exempt agriculture. My take is that these sectors be identified and be accommodated in the scope of exemption.
My third category is genuinely loss making businesses. Some enterprise owners hang on to loss making ventures hoping against hope. Konosuke Matsushita, a Japanese philosopher and founder of Panasonic electronics remarked. “If we cannot make a profit, that means we are committing a sort of crime against society. We take society’s capital, we take their people, we take their materials, yet without a good profit, we are using precious resources that could be better used elsewhere”.
Persons holding on to productive resources for no good course should release their capital. Minimum tax can initiate that debate especially with rural dwellers masquerading as farmers.Another perspective to minimum tax is the reintroduction of turnover tax. Businesses with annual turnover of less than Sh.50 Million fall in the turnover tax regime. Minimum tax is for entities above this range. It’s not a coincidence that the two taxes are charged at 1% of the gross receipts. If smaller businesses must pay taxes at 1%, their larger counterparts should at least pay the same. This addresses fundamental issues in taxation, fairness and closing loopholes for tax evasion.
Loss making entities have always been here with us. What have the lobby groups, policy makers and industry players been doing about it? Let’s expand the scope of this conversation beyond taxation.