Informal sector holds big economic promise

Despite the tremendous potential, the sector has remained the taxman’s hardest nut to crack. FILE PHOTO | NMG 

By ELIZABETH MEYO

Summary

• Despite the tremendous potential, the sector has remained the taxman’s hardest nut to crack.
• Lack of formal structures and a tax framework that suits the sector have been major drawbacks in the taxman’s quest to tap revenue from this sector.
• In the 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.

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 over 80 percent of employment opportunities in Kenya.

Despite the tremendous potential, the sector has remained the taxman’s hardest nut to crack. Lack of formal structures and a tax framework that suits the sector have been major drawbacks in the taxman’s quest to tap revenue from this sector.

In the 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 percent of the single business permit or trade licence fee and payable upon application or renewal of the licence. Unlike other taxes, presumptive tax is a final tax and does not require filing of a tax return thereby making it simpler 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), which was first introduced in the Kenyan taxation framework in 2007 with a view to tap revenue from the slippery and volatile informal sector.

Although Kenya has made significant strides towards simplification of taxation of the informal sector such as the introduction of presumptive tax, we are yet to achieve the ultimate goal. It is for this reason that through the Finance Act 2019, the Government has reintroduced 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 reintroduced 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 tremendous and promising step towards comprehensive revenue streamlining of the informal sector. In spite of the revenue collection challenges that have marred the informal sector, sector players have come forward and expressed their willingness to pay taxes when a simpler framework is put in place. This informs the government’s resolve to reintroduce a simpler version of ToT in the framework.

To further enhance tax compliance levels in the informal sector, the 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 contributing factor to low compliance levels within the informal sector has been a wide tax education gap, which the authority now hopes to effectively bridge through sensitisations.

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 resulting from 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 by the sector means more revenue for the government. This will go a long way in bridging the budget deficits that we have been grappling with. In turn, the government will more comfortably provide crucial services like healthcare, education and undertake infrastructural projects without relying 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 business partner. High levels of tax compliance therefore open up more opportunities to trade with even government and non-governmental bodies, hence more returns.

The authority and the government at large will continue exploring more avenues of simplifying tax administration in the informal sector until the sector’s full potential is felt in the national revenue coffers. KRA therefore calls on all sector players to take this patriotic duty positively for a better Kenya.