Simplified small-business tax regimes exist to bring enterprises into the tax net with minimal paperwork, and they do that job well. For a trader with no accountant and no systems, paying a percentage of sales is vastly better than not being taxed at all — for the state and, often, for the business.
The difficulty is what happens next. These regimes are designed for businesses at a particular stage, and growing companies tend to stay in them past the point where they still make sense. The cost of overstaying is partly tax and largely something else: the regime shapes the records you keep, and the records you keep determine what your business is eventually worth.
The main regimes
Kenya: Turnover Tax at 1.5% of gross turnover for resident persons with annual turnover between KES 1 million and KES 25 million, filed and paid monthly.
Uganda: Presumptive tax for businesses with turnover up to UGX 150 million, with certain professional, public utility, entertainment and construction services excluded. Eligible taxpayers may elect into the normal regime instead.
Rwanda: Micro-enterprises pay flat amounts by turnover band; small businesses with turnover between RWF 12 million and RWF 20 million pay a lump sum of 3% of turnover.
Ethiopia: The Income Tax (Amendment) Proclamation No. 1395/2025 repealed the turnover tax regime altogether, moving businesses toward profit-based taxation alongside a new Minimum Alternative Tax.
Ethiopia's repeal is worth noting by anyone relying on a simplified regime elsewhere. These frameworks are policy instruments, and policy changes.
The costs that are not obvious
Tax on sales, not profit. A trader operating on 3% net margins and paying 1.5% of turnover is paying tax equivalent to half their profit. The headline rate is low; the effective rate on earnings may not be.
No relief for expenditure. Investment in staff, marketing, equipment or premises does not reduce the bill. The regime is neutral as to whether you are building the business or harvesting it, which disadvantages exactly the companies that are investing.
Losses still attract tax. In a bad year, turnover-based tax remains payable in full.
Weaker records as a by-product. This is the largest cost and the least visible. A regime requiring only turnover returns gives no reason to maintain accrual accounts, track margins by line, or reconcile anything. Three years later the business has no financial history to show a lender or a buyer — which is the informality discount arriving by a different route.
Threshold cliffs. Crossing the limit triggers full compliance, often VAT registration, and corporate tax, typically in the middle of a growth phase when management attention is scarcest.
The break-even calculation
In Kenya the arithmetic is simple enough to do on paper. Turnover Tax at 1.5% of sales equals corporate income tax at 30% of profit when the net profit margin is exactly 5%, because 30% × 5% = 1.5%.
Below a 5% taxable profit margin, Turnover Tax costs more than corporate tax would.
Above 5%, Turnover Tax is cheaper, provided you remain eligible.
Two consequences follow. First, the regime is most expensive for precisely the thin-margin, high-volume businesses — distribution, trading, fuel, FMCG — that it was most likely to attract. Second, you cannot know which side of the line you are on without preparing the full accounts the regime was supposed to spare you from.
Equivalent break-even points can be calculated for Uganda and Rwanda by applying the same logic to their rates and thresholds, and the general shape is the same: simplicity favours high-margin businesses and penalises thin-margin ones.
A worked illustration
A Nairobi retailer turns over KES 20 million a year.
Scenario A — 3% net margin. Profit of KES 600,000. TOT at 1.5% = KES 300,000, or 50% of profit. Corporate tax at 30% would have been KES 180,000.
Scenario B — 12% net margin. Profit of KES 2.4 million. TOT = KES 300,000, or 12.5% of profit. Corporate tax would have been KES 720,000.
Identical turnover, identical regime, opposite conclusions. The figures are illustrative and individual circumstances vary, but the lesson generalises: the regime is not good or bad in itself, and the only way to know which it is for you is to prepare the accounts.
The valuation effect outlives the tax question
Even where a simplified regime is genuinely cheaper, it may still be the wrong long-term choice, because buyers and lenders do not care what you paid in tax. They care what they can see.
They want full accrual accounts showing profit, assets and liabilities; evidence of expenses, margins and working capital; and audited statements for any transaction of size. A business that has filed only turnover returns for five years has essentially nothing to show them — not because it performed badly, but because it never generated the record.
This is why many SMEs on simplified regimes choose to prepare full IFRS-based accounts anyway, with a provision for the turnover tax actually payable. They pay the simpler tax and keep the better records. The accounting cost is real but modest; the alternative is to arrive at a transaction with five years of invisible history.
The signals that you have outgrown the regime
Banks or large customers routinely ask for audited accounts you do not have
You are bidding for tenders that require VAT registration and full compliance
Margins are compressing as you compete for larger contracts
You are planning significant capital investment that would generate deductible expenses or capital allowances
You are within sight of the threshold, where crossing is a matter of when rather than whether
You intend to raise debt or equity, or sell, within three years
The questions that decide your position
What is your actual taxable profit margin — not your gross margin, and not an estimate?
On that margin, which regime costs less this year, and which will cost less at the size you expect to be in three years?
If you crossed the threshold tomorrow, what would full compliance and VAT registration do to your pricing, your systems and your cash cycle?
What records would you need to have been keeping, starting now, for a buyer or lender to understand your business in three years' time?
Would your customers absorb VAT, or would it come out of your margin?
Is the right move to change regime, or to stay in it while keeping full accounts anyway?
Where founders need guidance
The move out of a simplified regime is usually handled as a compliance event — something triggered by a threshold and dealt with reactively. Treated that way it is disruptive and expensive. Planned eighteen months ahead, it is an upgrade in credibility that happens to change how you file.
Deciding when to graduate, how to price for VAT, and what financial infrastructure to build first depends on your margins, your customers and what you intend to do with the business. Acquihub advises East African founders on building businesses toward investability, including the financial reporting foundation that determines what a buyer can eventually see. Talk to us if you are approaching a threshold or planning to raise or sell within a few years.
Frequently asked questions
What is Kenya's Turnover Tax rate? 1.5% of gross turnover, for resident persons with annual turnover between KES 1 million and KES 25 million, filed and paid monthly.
At what margin does Turnover Tax cost more than corporate tax in Kenya? Below a 5% net profit margin. Turnover Tax at 1.5% of sales equals corporate tax at 30% of profit at exactly a 5% margin, so thinner margins make the turnover regime more expensive.
What is Uganda's presumptive tax threshold? It applies to businesses with turnover up to UGX 150 million, excluding certain professional, public utility, entertainment and construction services. Eligible taxpayers may elect into the normal regime.
Does Rwanda have a turnover-based small business tax? Yes. Micro-enterprises pay flat amounts by turnover band, and small businesses with turnover between RWF 12 million and RWF 20 million pay a lump sum of 3% of turnover.
Did Ethiopia abolish turnover tax? Yes, under the Income Tax (Amendment) Proclamation No. 1395/2025, which moved businesses toward profit-based taxation alongside a new Minimum Alternative Tax.
Can I stay on a simplified regime and still keep full accounts? Yes, and many growing SMEs do. Preparing full accrual accounts with a provision for the turnover tax actually payable gives lenders and buyers something to read while retaining the simpler tax treatment.