Nobody likes paying tax. But taxes are a necessary part of the social contract between the government and the people, where everybody gives up something in exchange for security and rule of law promised by the state.
Long before he became the famous British Prime Minister, Winston Churchill was a Member of Parliament, where he said, “Taxes are an evil — a necessary evil but still an evil — and the fewer we have of them, the better.”
The government is facing a revenue shortfall as a result of the ongoing economic slowdown in Kenya. To blame for the current situation are huge government debt, loss of public funds and a mix of well-intentioned economic decisions that ended up with negative impacts on business.
To raise more money, the government is increasing the reach of taxes across the population. One of those taxes is the turnover tax on small business owners. Now labelled the ‘Mama Mboga tax’, turnover tax is aimed at businesses whose yearly turnover does not exceed Sh5 million. The tax is payable each month at a rate of three per cent on gross sales.
Elizabeth Meyo, the Commissioner for Domestic Taxes at the Kenya Revenue Authority, says Kenya is simply heeding calls by economists that governments get informal sector enterprises into paying taxes. In a column published in the Star in February, Meyo wrote that turnover tax was reintroduced to “bring the informal sector into the tax bracket and ensure equitable distribution of the tax burden”.
Kenya’s experience with turnover tax began in 2007, with the assumption that small and micro enterprises don’t pay taxes. Turnover tax was replaced with presumptive tax in 2019 but was reinstated this year. A study conducted in Nairobi in 2014 found that most of the traders surveyed did not understand turnover tax and that calculating taxes was “very tedious and complicated”.
The study, written by Ambrose Jagongo and Thairu Kimaru, indicates that turnover tax had underperformed both in the number of SMEs recruited into the tax system and in the amount of revenue collected from the tax. The authors recommended that KRA simplify the tax registration process, conduct taxpayer awareness campaigns and reduce the complexity of tax rules.
The government has often been criticised for policies that make it very difficult to do business, but the recent push to increase government revenues has worsened the plight of SMEs. Crackdowns on every business activity — from construction sites to restaurants, imported goods, alcoholic beverages, public transport and movie shops — have raised questions over the government’s commitment to free enterprise.
LICENCES, PERMITS BURDEN
It has long been assumed that SMEs don’t pay taxes, but this is only as far as the salary tax — Pay as You Earn (PAYE) — is concerned. There are many other taxes SMEs pay and which salaried employees do not pay.
Key among the taxes is the business licence, whose fees start at Sh5,000 annually, but that’s just for a basic shop. Bigger types of businesses attract licence fees of as much as Sh60,000. Value Added Tax (VAT) is charged on retail sales and paid by the consumer, but the business bears the cost of compliance, including installing electronic tax registers (ETRs).
If running a bar and restaurant, there are catering levies in addition to more county government fees. There are Music Copyright dues to pay when you have a radio or television on business premises. In the public transport industry, there are all the NTSA and TLB requirements, not forgetting insurance fees.
If you are in construction, there are county government permits and fees charges by various regulatory bodies of the national government, such as the National Construction Authority, National Environment Management Authority, Energy and Petroleum Regulatory Authority, among others. Movie shops are required to pay fees to the Kenya Film Classification Board. Basically, there’s a tax, a fee and a levy for every single business activity.
Then there are the micro-traders, such as Mama Mboga, maize roasters, shoe shiners and hawkers. In many markets, micro-traders pay daily county government market fees, ranging from Sh30-50. In a typical month, that works out to about Sh750 to Sh1,250 per month in market fees.
Fuel taxes constitute a big chunk of the cost of doing business in Kenya. Data from the Energy and Petroleum Regulatory Authority shows that taxes on petrol constitute 42 per cent of the retail price, while taxes on diesel and kerosene are slightly lower at 36 per cent. By virtue of their work, which consumes a lot of fuel, public transport operators, truckers and boda boda (motorcycle riders) are contributing a large amount of tax to the national treasury compared to salaried employees.
With all the taxes and levies on SMEs, it would be inaccurate to suggest that the informal sector is not paying its fair share of taxes. The revamped turnover tax is adding more taxes onto SMEs, a sector already burdened with official taxes and sapped further by bribes demanded by persons with authority.
As the 2014 study on turnover tax showed, the huge number of SMEs and their high mobility means KRA will have a very difficult time trying to register them for turnover tax and getting them to pay. A vegetable vendor today might be a food vendor two months from now in a different location. While tracking down individuals is not difficult with current technology, enforcing the turnover tax could cost as much as the actual revenues collected from it.
Here’s a closing quote from the famous Winston Churchill, “The idea that a nation can tax itself into prosperity is one of the crudest delusions that has ever fuddled the human mind.”
Edited by T Jalio