Leverage small businesses, Jua Kali to expand tax base
By, FCPA George Mokua

Micro, small and medium enterprises (MSMEs) are engines of growth, vital to most economies. They are recognised as key enablers of economic growth and development.

The over 7.4 million MSMEs in Kenya employ about 14.1 million people or 93 per cent of the labour force. MSMEs account for 24 per cent of gross domestic product (GDP)—micro enterprises 12 per cent and small enterprises 11 per cent.

There is high startup failure amongst MSMEs with 2.2 million closing shop within five years and 46 per cent not making it past their first birthday. The most cited reason includes the high cost of credit finance and market access constraints, which account for about half of the cases of closure, the high cost of raw materials and also lack of government incentives that encourage entrepreneurship.

Kenya Revenue Authority (KRA) collection for FY 2021/22 is Sh1.92 trillion, from Sh1.56 trillion in FY 2020/21. The government has proposed various measures to broaden the tax base—such as an electronic tax invoice management system (eTims), expected to reduce the Value Added Tax (VAT) gap from 38.9 per cent to 19.8 per cent of the potential.

Other proposals include integrating the KRA tax system with the telcos; mapping rental properties to implement rental income tax measures by enhancing the mopping up of field data analysis; integrating iTax with the National Lands Information Management System; and use of mobile apps.

Another is bringing into the tax bracket the informal sector, the majority of whom are MSMEs. Further, the National Treasury gives the potential taxable base of the informal sector as Sh2.8 billion.

One way of broadening the tax bracket is by formalising the sub-sector—which most (53 per cent) are willing to comply with, as the 2016 World Bank survey report of informal enterprises on registration shows. The process includes obtaining licences, registering with business registration services (BRS) and compliance with statutory requirements.

This can be achieved through ways like harmonising taxes to reduce multiplicity, both at the national and sub-national levels; providing tax education for taxpayers; simplifying taxes to enhance uptake; leveraging on technology to integrate government and private sector systems; creating a simplified and responsive digital portal; simplifying the accounting model or framework; and encouraging greater uptake and usage of digital payment systems such as Till numbers for reliable data.


But the one incentive that will attract most MSMEs and indirectly pull them into the tax net (as they will be required to maintain audited financial statements) is through a guaranteed credit facility at less than single-digit borrowing interest rates.

According to an ILO report on the transport industry, there are over 65,000 matatu investors with huge annual turnover. The industry directly employs close to 350,000 workers, who are paid daily or weekly. On average, a matatu driver would earn Sh1,500 daily and a conductor Sh1,000. Similar rates would apply to wage employees in the construction sector.

Have the investors, contractors and farmers organised into corporate companies in the different value chains for taxation purposes? That will allow employers to deduct as an allowable expense the employee costs and the employees to obtain personal tax relief and access credit and save formally.

Mr Mokua is the chairman, Institute of Certified Public Accountants of Kenya (ICPAK). ceo@icpak.com.

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