Kenya, Uganda in plans to pull informal sector into tax bracket

Trading at a market in Kenya. Plans by Kenya and Uganda to bring small and micro enterprises into the tax net, in the wake of declining collections from the formal sector, face administration challenges. PHOTO | FILE 

By ALLAN OLINGO

In Summary

• Plans by Kenya and Uganda to bring small and micro enterprises into the tax net, in the wake of declining collections from the formal sector, face administration challenges.
• The two countries are looking to the revenue authorities to stem tax evasion in the informal sector, which claims that government budgets are not sensitive to their challenges like access to affordable credit and lack of enabling infrastructure.
• Uganda plans to enforce its presumptive tax, which has been at three per cent since 2014, while Kenya plans to apply turnover tax to traders, advance tax to commuter services, and the 10 per cent tax on gross rental income.

In 2008, Kenya implemented the turnover tax, applicable to any business whose turnover is between $5,000 and $50,000 during the year of operation.

The turnover tax was passed in the Finance Act 2006, and the rate charged is 3 per cent. Businesses taxed under this Act are expected to maintain cashbooks, sales receipts and invoices, daily sales summaries, purchase invoices and bank statements. The penalty for failing to file returns by the due date is $20.

Through the Finance Bill 2016, Treasury Secretary Henry Rotich amended a section of the Tax Procedures Act, laying the ground for the Kenya Revenue Authority to collect information in advance from selected taxpayers for purposes of pre-populating the information in Kenya’s iTax system.

KRA can now liaise with telecommunication firms like Safaricom, which operate mobile money platforms and banks, to act as the appointed collection agents. However, Safaricom has rejected KRA’s request to access its customers’ mobile money records.

Kenya has also amended the Rental Income Tax, a turnover tax for landlords whose gross rental income is $10,000 and below, which is charged at 10 per cent.

The new Bill also introduces a lower rental income threshold of $120 per month; the gross rent below this amount is therefore not taxable.

But the plans by Kenya and Uganda to bring small and micro enterprises into the tax net, in the wake of declining collections from the formal sector, face administration challenges.

Tax evasion

Last week, the two governments tasked their respective authorities to explore how to tax the informal sector, including small scale traders, farmers, boda boda and public service vehicle operators.

The two countries are looking to the revenue authorities to stem tax evasion in the informal sector, which claims that government budgets are not sensitive to their challenges like access to affordable credit and lack of enabling infrastructure.

Uganda plans to enforce its presumptive tax, which has been at three per cent since 2014, while Kenya plans to apply turnover tax to traders, advance tax to commuter services, and the 10 per cent tax on gross rental income.

Henry Saka, Commissioner for Domestic Taxes at the Uganda Revenue Authority, said they have categorised businesses in order to absorb them into the tax base.

“We have mapped regions and sectors and intend to capture them in the presumptive tax category. We have also asked business registration agencies to have the Tax Identification Number as their topmost requirement. Through this, we intend to absorb more of these businesses into the tax base,” Mr Saka said.

Offer incentives

Last year, Uganda revised its presumptive tax regime, simplifying it by categorising businesses and revising the applicable taxes. Businesses that register gross annual turnover between $14,754 and $22,131 per year are charged a presumptive tax of $276.6, or 1.5 per cent of the gross turnover, whichever is lower.

For businesses with a turnover of $29,508 or more, the tax rate will be 3 per cent, or the predetermined turnover tax, whichever is higher. Presumptive taxpayers are not required to file returns to the Uganda Revenue Authority.

Joseph Muvawala, the executive director of Uganda’s National Planning Authority, said it is important for the URA to offer incentives to the informal sector to attract them into the tax net.

“Dealing with the informal sector should be a strategic choice laced with incentives to make the business look beyond profits to the benefits that come with the formal channels that taxation brings,” Mr Muvawala said.

Kenya, on the other hand, has in recent years effected presumptive tax on the public transport sector as advance tax, and as turnover tax in retail outlets. Within the public transport sector this tax is payable in advance before a public service vehicle or a commercial vehicle is registered or licensed.

KRA Commissioner General John Njiraini did not respond to The EastAfrican’s queries on how they would effect the presumptive tax. However, insiders at the authority said they expect that county governments and agencies that deal with farmers, hoteliers and other businesses will be tasked with collecting the tax on their behalf.

No rush

In the current advance tax system, vans, pickups, trucks and lorries pay $15 per tonne of load capacity per year, or $24, whichever is higher. For saloons, station wagons, mini-buses, buses and coaches, $0.6 per passenger capacity per month is applicable, or $24, whichever is higher.

Job Kabochi, a tax partner at PwC, said KRA will have to seek a new approach to rope in the informal sector.

“They will look at raising taxes through the permit and licensing infrastructure. They should also forge a close alliance with existing local authority structures to undertake collections on their behalf. It is also important to start considering consumption tax on this sector as this is where the sector’s interaction with the tax system occurs,” Mr Kabochi said.

Apurva Sanghi, the lead economist and programme leader for Kenya, Rwanda, Uganda and Eritrea at the World Bank, said there should be no rush to formalise informal businesses, but instead government should strive to improve the business environment, and simplify tax procedures before roping them into the tax base.

“In the World Bank survey of 2013, one of the two top reasons for businesses to remain informal was tax procedures and ease of doing businesses; nevertheless more than 50 per cent of them would like to be formal,” Mr Sanghi said.