Many people especially employees, wonder why they are required to file the annual tax return yet tax has already been deducted during the year and paid to KRA by the employer.
To demystify this, we need to understand what a tax return is and the importance of filing the return.
A tax return is a declaration made by a taxpayer of all income earned during a year of income, detailing the tax payable or refund claimable in the year of income. A tax return summarises the income earned and taxes paid (if any) in a year of income. In Kenya, the year of income for individuals runs from 1st January to 31st December and they are required to file their returns between 1st January to 30th June following the year of income. For companies, the filing is done within six months after the end of the accounting period.
Where a return is filed after the due date, late filing penalty of five percent of the tax due or Ksh.2000, whichever is higher, for individuals is chargeable. The late filing penalty for non-individuals is five percent of the tax due or Ksh. 20,000 whichever is higher. Late payment interest at 1% per month is also applicable until the tax is fully paid.
Why is it important to file returns? First, it is a legal requirement according to section 52B of the Income Tax Act cap 470. The law provides that every person with taxable income is required to file their returns. Kenya operates on a self-assessment tax regime where every person is required to assess himself or herself and declare the income earned during the year and pay any taxes due. Filing of returns and payment of taxes therefore ensures that one is compliant with the Kenyan tax laws.
Secondly, filing returns enables a person establish whether there are taxes due and payable or any refund due at the end of a year of income. Where a person has not accrued any income in a year, one is required to file a nil return.
Finally, for employment income purposes, filing returns enables Kenya Revenue Authority reconcile the tax deducted from employees’ income under the Pay As You Earn (PAYE) system and the declarations made by employees at the end of the year. Return filing therefore enhances accountability of taxes deducted from employees.
The convenience that comes with being tax compliant cannot be overstated. Always ensure that your tax return is filed by the due date and as much as possible avoid the last minute rush.