Small businesses with an annual turnover of Rwf20-50 million will have to ensure their books are in order after the Rwanda Revenue Authority revised their model of computing income tax.

Previously, the businesses would pay a flat fee of 3 per cent of their turnover but with the changes, they will now pay 30 per cent of their profits.

The new law that also reduced the taxing threshold for small businesses from Rwf50 million to Rwf20 million, was enacted in April this year.

The only businesses that will be eligible for the 3 per cent flat fee are those with a turnover of Rwf12 - 20 million.

This means that they will have to properly count their expenses and earnings so they can determine what their real profit is and then pay 30 per cent tax on it.

Paul Mugambwa, the Associate Director for PriceWaterHouseCoopers (PwC) Rwanda, an auditing firm, said that the change means that a compliance cost will be paid and winners in this case are likely to be professional accountants.

The latter will get hired by both businesses and the RRA in order to determine what are the real expenses and net profits for businesses that have an annual turn-over of over Rwf20 million.

After determining their net profits, the businesses will pay 30 per cent of their counted net profit to the RRA as part of income tax.

"There is going to be an added compliance cost to the people who are going to be excluded from the flat tax as they will be required to maintain proper books of account,” he said.

The tax expert told The New Times that RRA will need staff to work in the Small and Medium Entreprises (SMEs) area as part of the process to determine their real profits.

"RRA may want to hire more auditors,” he said.

If well executed, Mugambwa said, the move is likely to increase the number of small businesses that pay taxes on their real profits and this might bring in more money in taxes for the government.

The Chairperson of the Private Sector Federation (PSF), Robert Bafakulera, said that the change will be tough on small businesses because they will have to hire accountants and prepare books but good for their future growth.

"A number of businesses which have been benefiting on flat tax regime will reduce. Normally, it is good to declare your real financial performance but it is still a challenge to small and medium enterprises,” Bafakulera added.

The flat tax system was easy for many businesses to comply with because of easy calculation of taxes and lack of thorough audits on the businesses, the PSF chairman said.

But Bafakulera is, however, not convinced that the move will bring in more money for the taxman.

"Not necessarily; government may not make more money,” he said while responding to the question of whether the move is likely to help the government collect more money in taxes.

Late last month, RRA announced that it had started enforcing the new Income Tax law, which officials described as very likely to encourage voluntary compliance among taxpayers.

The government has recently increased efforts at efficiently collecting taxes as it works on increasing domestic resources to fund the national budget.

In the next fiscal year 2018-2019, increase in domestic revenues will largely be attributed to more efficient tax collection as taxes to be collected in the year will increase by Rwf151.4 billion from the Rwf1,200.3 billion targeted in the current revised budget for 2017-2018.

editorial@newtimes.co.rw