The Finance Act 2020 of 30th June 2020 introduced Minimum tax (MT), chargeable at the rate of one percent of the gross turnover. MT is provided under section 12D of the Income Tax Act (CAP 470).
Why minimum tax? A number of people may wonder. There are some businesses that continually declare losses in their returns and not paying taxes but have been operational over the years. Conventionally, tax levied on business income is based on the profit made. However, when a business makes losses in a financial year, no taxes are payable and the loss is carried forward to the next period. To address this inequity in tax payment, minimum tax was introduced to ensure that all persons pay a fair share of tax.
Some concerns have been raised on minimum tax being double taxation for those paying instalment tax. Contrary to those claims, paying this tax will not amount to double taxation since it is an alternative to instalment tax. Where instalment tax payable by a person is higher than minimum tax, then the person shall pay instalment tax; however, where the minimum tax is higher than instalment tax, then the minimum tax shall be payable.
Minimum tax shall be paid in instalments and shall be due on the 20th day of each period ending on the 4th,6th,9th and 12th month of the year of income. For instance, if the year of income ends December, then instalments shall be due on 20th of April, 20th of June,20th of September and 20th of December.
By the end of accounting period, if it is established that the tax payable is greater than the instalment and minimum tax paid, then the outstanding amount is paid as balance of tax on or before the last day of the 4th month following the end of the accounting period. However, if the tax liability is less than minimum tax or the business is in a loss position, then minimum tax paid shall be final.
The introduction of minimum tax is not all doom and gloom since some incomes will be exempt from minimum tax. These include; Income exempted under the 1st Schedule of the Income Act, employment income, residential rental income, any income subject to capital gains tax, income subject to turnover tax, and income of extractives sector.
The introduction of Minimum tax is a strategy of expanding the tax base, since it will rope in more people who were previously not paying tax. It is also way of fostering equity and fairness in the tax system since the tax burden will not be carried by only those who have been compliant over the years but everyone will pay a fair share of tax.
Tax Education Officer