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High taxes choking small businesses to the grave

By Mohamed Awal and Saada Hassan | October 8th 2019 at 08:52:00 GMT +0300

Edwin Kenyagah stares blankly at his half-empty shop, holding his chin as he woos passersby.

They ignore him - or maybe they too are staring at a bleak economic future.

Kenyagah captures our attention as one customer buys a chewing gum. We exchange pleasantries and seek to understand why he looks so dejected at 10.30 am.

Before answering, another client hands him Sh2,000 to deposit to the M-Pesa mobile money wallet. On average, for a small 4x6 feet shop, Kenyagah pays the Government about Sh24,000 annually in taxes.

“I pay taxes for almost everything in this shop. Trading licence, food handling licence, and fire licence annually, not forgetting my monthly rent, which keeps on hiking sporadically,” he says.

He represents many other small traders who face a tough operating environment.

No sector has borne the brunt of tough economic times like Small and Medium Enterprises (SMEs) in Kenya, forcing numerous businesses to close shop.

According to the 2016 Kenya National Bureau of Statistics (KNBS) report, about 2.2 million small enterprises had closed shop in the previous five years due to shortage of operating funds, increased operating expenses and declining income.

To worsen matters, this year Kenya Revenue Authority (KRA) issued a directive targeting small business with a presumptive tax which would be included in their renewable trading licence.

The 15 per cent presumptive tax increment would target businesses with a profit of less than Sh5 million in income per year across all counties as KRA seeks to widen its tax revenue. It was later suspended.

Across the street from Kenyagah is a pharmaceutical shop located on a strategic position, with a well-lit advertising board at the door to entice customers.

Brian, the pharmacist, pays for the trading licence, fire licence and Pharmacy and Poisons Board licence. He also pays for the adverts outside the shop.

“Other than the annual Sh15,000 I pay to the Poisons and Pharmacy Board, I have to pay the County Government of Nairobi for the signboard outside my shop and my trading licence,” he says.

Depending on the type of shop you operate, different government agencies will charge you different licences. It is this multiplicity that is hurting the traders, with some opting to close shop.

“In January, I usually feel like closing shop since I end up giving all the month’s earning to various government agencies. I cannot hike food prices for my customers, because I would risk losing them to my competitors,” says Teresia Muchene, who operates a hotel at the City Market.

Small businesses are not the only victims of the high appetite by the taxman.

Last week, the embattled gambling firm SportPesa announced its departure from the Kenyan market, citing the high cost of doing business and taxes imposed by KRA.

This was after another firm - BetIn announced its exit from the market - all leading to loss of over 800 jobs.

Other firms that have cumulatively cut at least 2,000 jobs in the last three months include Andela, Ola Energy, Sanlam, East African Portland Cement, Telkom Kenya, Stanbic Bank and East African Breweries.

The employees are also taxpayers, meaning the taxman will rake in less from the Pay as You Earn.

SportPesa said it would resume operations when Kenya puts in place a favourable operating and non-hostile regulatory environment.

While the betting giant has left, the small businesses that heavily depended on the firm have started to feel the pinch.

Cyber cafés are the biggest victims of the betting firm’s departure, with the majority now left to survive on a few customers who come for Internet services.

This is unlike before, where the bulk of their profits were hinged on gamblers who packed their shops to place their bets.

In an earlier interview with The Standard, Wycliffe Aol who runs a cyber in Pipeline Estate said things are bleak, and that they are soon closing shop.

 “We can no longer pay our rents, we are struggling as a result of the clampdown on betting firms. If something is not done soon, families are going to break,” he said.

Among its recommendations, the 2016 KNBS report highlighted the need for reduction of the number of business licences needed in a single business.

“Some businesses are required to acquire multiple licences at times from the same or different State agencies. There is a need to reduce the number of licences required per single business,” the 2016 report read in part.

“This can be done by integrating the various licences into one comprehensive document; offering the licence in a central place and ensuring that the process is fast and efficient.”

In May this year, miraa traders in Lamu County took to the street decrying an order by KRA to increase taxes levied on the sellers.

The traders who spoke to Financial Standard lamented that the move would put them out of business, affecting their livelihoods.

“KRA is saying that we are running a lucrative business, which is not the case as our profit margins are nowhere close to their projections,” Halima Abdi, a trader told The Standard team in an interview.

With the introduction of county governments, small businesses have fallen prey to the hunger of both the revenue authority and the counties to net more revenue.

As Kenyagah says, he has been forced to multiply the amount of tax he pays to the Government after the promulgation of the new constitution.

“When we had MPs, councillors and the President only, the taxes were favourable, but once the county government was introduced, things changed completely,” he says.

The move by the State to use licences as a primary source of income is what continues to shrink the small enterprises.

In its report on SMEs, the KNBS recommended that the Government should use licences as a regulatory function only.

“The cost of acquiring licences should also be reasonable. The licences should only serve a regulatory function and not as a source of revenue for the Government as is currently the practice,” the report read.

Kenyagah, like many other small traders, continues to stare at an uncertain future. Taxes are increasing forcing them to close shops.

This has led to further loss of jobs against President Uhuru Kenyatta’s job creation pledge under the Big Four agenda.

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