Expanding tax base through small firms, formalising ‘jua kali’

FRANCIS NDERITU

Micro, Small and Medium Enterprises popularly known as MSMEs are engines of growth, vital to most economies.

Micro enterprises have less than 10 employees, small enterprises have 10-49 employees while medium-sized enterprises have 50-49 employees with annual turnovers estimated at less than 10 million, 50 million and less than 100 million respectively.

In Kenya, it is estimated that there are more than 7.4 million MSMEs in Kenya, employing about 14.1 million people, which account for 93 percent of the total labour force.

MSMEs account for 24 percent of the Gross Domestic Product.

The above notwithstanding, the contribution of MSMEs in the country to GDP is lower than that of South Africa (55 percent) and Malaysia (37 percent).

Statistics also indicate there is a high start-up failure among MSMEs whereby about 2.2 million MSEs close within five years of their establishment and about 46 percent having not made it past their first birthday.

The most cited reason for this situation includes the high cost of credit finance and market access constraints.

A further interrogation into these alludes to their informal nature as the main reason behind the closure. Informality limits access to market, finance, electricity, water and other public services.

The Kenya Revenue Authority (KRA) revenue collection for the FY 2021/22 stands at approximately Sh1.92 trillion from Sh1.56 trillion recorded in the FY 2020/21.

The Government projects to collect about Sh2.2 trillion in the current financial year.

According to KRA’s 2018/19 performance report, Kenya has about eight million registered taxpayers. Out of a population of about 47 million people, about eight percent of the population is contributing to income tax.

The aftermath of the low tax revenue collection has led to increased borrowing. Indeed, the country is now ranked among those at a high risk of public debt distress.

The Government has proposed various measures to broaden the tax base including fully rolling out electronic Tax Invoice Management System (eTIMS) which is expected to reduce Value Added Tax gap from 38.9 percent to 19.8 percent of the potential.

The Government also intends to expand the tax base by netting the informal sector into the tax bracket, the majority of whom are the MSMEs.

Further, the Treasury noted that the potential taxable base of the informal sector is Sh2.8 billion. This, therefore, buttresses the need to address the challenges impeding MSMEs development through designing strategies and policy interventions to allow them to tap into existing and emerging opportunities.

One way to broaden the tax bracket is by formalising the sub-sector, a matter that most of them (53 percent) are willing to comply with, according to the 2016 World Bank survey.

The process of formalisation includes obtaining licences, registering with Business Registration Services and compliance with statutory requirements such as declaring taxable income by filing tax annual tax returns, social security declarations and compliance with labour laws.

Addressing these challenges faced by MSMEs is one sure way of incentivising them and wooing them into the tax net which will ultimately expand the tax base.

This can be achieved through various ways including harmonising taxes to reduce the multiplicity of taxes both at national and subnational levels, and providing tax education for taxpayers to understand the need for tax payment.

Apart from increasing tax revenues, formalisation will ease difficulties that MSMEs face in access to finance, electricity, water, and other public services, as well as lowering corruption and harassment from public officials to bolster economic growth.

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