Third Eye

Taxman must ease tax demands especially for SMEs

Monday, August 2nd, 2021 00:00 |
Times Tower, the headquarters of the Kenya Revenue Authority. Photo/PD/File

The Kenya Revenue Authority (KRA) is under pressure to generate growing tax revenues.

Despite a struggling economy, the government has ramped up its budget estimates for 2021/2022 by a nine per cent to reach Sh3.66 trillion, and expects to collect Sh1.7 trillion in taxes.

The pressures on KRA to generate this revenue must be humongous. However, KRA is generating this money from an economy severely hit by the coronavirus pandemic. The question must be asked about how realistic its expectations are.

In the last one and a half years, millions of businesses, especially micro, small and medium enterprises (MSMEs), have collapsed. 

Millions have lost jobs, and will remain unemployed for years. The promised payment of government pending bills is yet to happen. So where will the tax revenues come from?

Undeterred, KRA apparently thinks that tougher collection measures are the answer.

Basic economics teaches us that tax revenues come from business profits, incomes from employees, and indirect taxes like excise duties on transactions.

When the economy tanks, businesses fail, transactions contract, profits reduce and losses soar and jobs are lost. 

That is hardly the environment in which tax authorities ramp up enforcement and collection measures.

That is the time for farsighted Treasuries to ease off the gas pedal and give space to businesses to use the available resources to survive. It is time KRA tempered its expectations.

KRA reported that it surpassed its 2020/21 target by 3.9 per cent to hit Sh1.66 trillion, during a year in which economic performance, at 0.6 per cent, was the worst in recent memory.

Clearly, something is not gelling. This performance can only be achieved at the cost of bleeding an economy already gasping for air. It will set recovery back years.

KRA has particularly put a laser beam focus on small and medium enterprises (SMEs) in its drive to boost revenue, driven by its oft stated belief that there is a big untapped reservoir of taxpayers within SMEs.

This notion is completely misguided. The nine million-odd SMEs in Kenya are largely made up of small businesses who struggle every day with zero government support just to get by to feed their families. 

Most are up to the neck in debt, have no access to credit, do small value transactions, struggle to get paid, and their cash flows are very poor.

They have been completely ignored by government. These businesses are nothing more than subsistence vehicles.

Currently, most SMEs have either closed shop or are battling to stay alive. This is the time KRA has chosen to adopt a very aggressive enforcement push against them. 

Further, the operators are facing rising cost of living and doing business, among other financial pressures that have pushed Kenyans to the wall.

No wonder suicides jumped to 486 in 2020, and growing. 

Worse, many of these operators are listed by Credit Reference Bureau because of defaults, especially in the last one year.

They will struggle to find financing to get back into business. Something must give.

KRA needs to ease off the gas pedal especially at this time. The government must get more creative with ways of assisting businesses become viable again to safeguard or rejuvenate tax bases for the post-corona period.

Instead, KRA seems determined to conjure up even more invasive ways of wringing the last drop of blood from business which are literally dead men standing. 

Give a five-year tax moratorium to SMEs whose annual revenues are below Sh10 million.

These are highly unlikely to have any cashflow to pay up any demands anyway and if pushed, will simply sink deeper into debt to avoid getting into enforcement entanglements with KRA.

Write off SME tax arrears that are more than three years old as they are unlikely ever to get paid.

This is simply prudent to release KRA resources to deal with more viable tax targets.

One cannot continue doing the same thing over and over again and expect different results.

KRA must rethink its enforcement model as the means of generating more revenue in an economy hamstrung by coronavirus. [email protected]

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