Towards harnessing informal sector’s tax potential

Wednesday, January 8th, 2020 00:00 |
KRA headquarters. Photo/File

Elizabeth Meyo

For years now, the informal sector has been a key economic hub in many parts of the world.

As various economic findings have unanimously put it, the economic contribution of the informal sector in most developing countries’ Gross Domestic Product is substantial. 

Apart from the substantial GDP contribution, the informal sector is one of the biggest employers in Kenya.

According to an article published by the Institute of Economic Affairs in 2016 titled Economic Burden of the Informal Sector, the sector currently accounts for more than 80 per cent of jobs created in Kenya. 

Yet despite the tremendous potential, the sector has remained the hardest nut to crack for the taxman.

Lack of formal structures and a tax framework that suits the sector have been major drawbacks in the government’s  quest to tap revenue from this sector. 

In light of this, the government has been keen to put in place a simpler taxation framework to enhance tax compliance in this sector.

Early this year, the government took a stab at the taxation of the informal sector by introducing a simpler tax regime known as presumptive tax.

 Presumptive tax is charged at a rate of 15 per cent of the single business permit or trade licence fee and payable upon application or renewal of the licence.

Unlike other taxes, presumptive is a final tax and does not require filing of a tax return, thereby making it easier to comply with.

At the point of implementation, the threshold to qualify for presumptive tax was an annual turnover of Sh5 million and below.  

Implementation of presumptive tax phased out Turnover Tax (ToT). ToT was first introduced in the local taxation framework in 2007, with a view to tap revenue from the slippery  informal sector. 

Although Kenya has made significant strides towards simplification of taxation in the sector, we are yet to achieve the ultimate goal.

It is for this reason that through the Finance Act 2019, the government has re-introduced ToT to enhance tax compliance in the informal sector. 

Business ventures with an annual turnover of less than Sh5 million qualify for both turnover tax and presumptive tax. However, the presumptive tax paid will be used to offset the ToT payable.

The re-introduced ToT is payable monthly at the rate of three per cent on the gross turnover in the month. 

Coupling ToT with Presumptive Tax is a promising step towards comprehensive revenue streamlining of the informal sector.

In spite of the revenue collection challenges that have marred the sector, stakeholders have come forward and expressed their willingness to pay taxes when a simpler framework is put in place. 

To further enhance compliance levels in the sector, Kenya Revenue Authority (KRA) has put in place an elaborate tax education framework specially tailored to meet the needs of the sector.

Through strategic assessments, KRA has gathered that a key contributor to low compliance levels within the informal sector has been a wide tax education gap.

With presumptive tax, ToT and tax education now in place, KRA is upbeat that the taxation landscape of the informal sector is set to change for the good. 

The benefits of full compliance by the informal sector cannot be overstated. First and most important, it will have a significant impact on KRA’s tax base expansion endeavours.

Compliance means more revenue for the government. This will go a long way in bridging the budget deficits the government has been grappling with.

This will facilitate provision of services such as healthcare, education as well as fund infrastructural projects without reliance on foreign aid.

Secondly, a clean tax record is a pedestal to the prosperity of any business. No business enterprise worth its salt would risk doing business with a non-compliant partner.

High levels of tax compliance therefore open up more opportunities to trade with even government and non-governmental bodies.    

KRA and the government generally will continue exploring more avenues of simplifying tax administration in the informal sector until its full potential is felt in the national revenue coffers. 

—The writer is the Commissioner of Domestic Taxes at the Kenya Revenue Authority

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