Why registering as taxpayers is beneficial to small businesses

Data from the Kenya Association of Manufacturers (KAM) shows that Kenya’s micro, small and medium enterprises (MSME) constitute 98 per cent of all businesses in the country with the sector providing jobs to 50 per cent of young employment seekers in the manufacturing and service industries per annum.

The sector contributes slightly over 30 per cent of total employment in the country. According to various studies, up to 55 per cent of all household incomes in Kenya come from business and business related sources, largely MSMEs.

Further, according to the Economic Survey (2017) there are about 1.56 million licensed MSMEs and 5.85 million unlicensed similar businesses in Kenya. This means that less than 27 per cent of all businesses in Kenya are registered. Of all these businesses, 92.2 per cent are micro enterprises while only 7.1 per cent and 0.7 per cent are small and medium enterprises respectively.

These establishments are both in the formal and informal sectors.

One of the reasons that most enterprises give for not wanting to get registered is that they do not want to open themselves to taxation.

However, as we shall see, this ‘benefit’ is both superficial and unprofitable for business in the long run because when enterprises stay unregistered they lose out on many real benefits that translate into higher turnover and profitability.

So, what do the rather gloomy statistics of unregistered businesses portend for the MSMEs in Kenya?

For starters, both licensed and unlicensed businesses operate in the same space yet they enjoy different levels of privilege. Although there exists superficial differences in product pricing owing to deceptive cost discrepancies, unregistered businesses can also not access full benefits of registration including loans and government services.

They, also, cannot bid for government contracts or even partner with other businesses to take advantage of communal benefits including crucial networks especially with larger companies who they could even enter into sub-contracts with.

These enterprises are therefore perpetually locked out of useful business associations. Simply put, if an enterprise is not a tax payer it cannot grow!

It is noteworthy that the Kenya Revenue Authority offers a myriad of benefits to MSMEs which are already registered as tax payers. These include personalized tax and customs advisory services which are offered through KRA’s vast network, social media and telephony among others.

These services help enterprises to understand the tax and customs environment especially if they intend to get into import and export business. The Authority also offers market and networking opportunities through its taxpayers’ roundtables where the business community is invited to discuss various issues affecting them and receive business advice in line with the core business of the authority. In the process, the Authority avails opportunities for entrepreneurs to network and even establish new markets.

Besides, MSMEs who are registered with the taxman enjoy import incentives aimed at encouraging manufacturing and export. These include reduced import tariffs on inputs such as machinery and raw materials. MSMEs in the export business also enjoy export incentive schemes as well.

For instance, KRA does not levy VAT on exports. It also has a provision for capital allowances on installed machinery and a possible 20 per cent export compensation arrangement. There are certainly many other incentives that exporters can benefit from.

With KRA collecting in excess of Sh2.3 trillion per year, it plays a critical role in the provision of the services that MSMEs enjoy. Indeed, over 65 per cent Kenya’s budget is funded through taxes.

The electricity we use, the education our children receive, the medical services provided by our hospitals, the infrastructure we enjoy and the services we get from various government agencies are funded largely by the taxes that we, including MSMEs, pay.

Additionally, KRA is a large entity which provides numerous business opportunities for enterprises. In line with the government directive on public procurement, 30 per cent of all procurement at KRA goes to enterprises run by the youth, women and people with disabilities which are mainly MSMEs.

There are certainly numerous other ways through which KRA facilitates MSME’s. Unregistered enterprises should register as taxpayers in order to open doors to business opportunities that can only be accessed once the business acquires the all-important PIN number.

Dr Mwirigi is the Deputy Commissioner in charge of academics at the Kenya School of Revenue Administration