Taxes: The chickens come home to roost for hustlers

KRA has launched an aggressive tax collection campaign. [iStockphoto] 

After years of relying on large manufacturers, importers and salaried Kenyans, the Kenya Revenue Authority (KRA) has launched an aggressive campaign to fulfil President William Ruto’s demand for more revenue to meet his ambitious pre-election pledges by going after the hustlers.

The Ruto Government last year tasked KRA to collect Sh4 trillion from taxpayers against the Sh3 trillion it collected in the 2002/23 financial year.

This has seen the taxman launch a new system targeting informal businesses. From bodaboda riders to jua kali artisans from matatu operators to mama mbogas these business people will have to issue etims receipts for all the transactions paid.

The government has made it in such a way businesses will watch over each other and not KRA as has been the case.

The move comes months after the Kenya Revenue Authority disclosed its helplessness in collecting taxes from the informal economy, which comprises small traders, small shops, and other businesses that have long evaded the taxman’s net.

Any business that will file its taxes and seek refunds will have to use etims receipt to indicate expenses for the refunds to be effected.

For example, if an employer pays taxi money for his employees and needs to mark that as an expense he would have to file the etims record which means the taxi driver has to provide the receipt. The import is KRA will have included this driver in the tax bracket. The same applies to eateries, hotels and farmers too.

The move is likely to put scrutiny on the Ruto Government at a time when businesses have complained of the huge compliance burden for small businesses. According to the Kenya Association of Manufacturers (KAM) the regulatory burden for SMEs in Kenya is quite heavy. The lobby recently raised alarm about the ever-increasing costs of doing business in Kenya.

“Manufacturing SMEs decried the numerous standards and regulations that they need to adhere to, and their ensuing cost. Additionally, the various taxes, licenses, cess, fees and permits that need to be paid,” said KAM.

“For SMEs, the requirements from numerous agencies and the national and county governments, take up a large portion of their operational costs. At a time when businesses are still reeling from the impact of the pandemic, with some facing challenges in meeting their financial obligations, this is a dire situation that calls for urgent intervention.”

SMEs constitute 98 per cent of businesses in the country and have an annual job creation of 30 per cent of all new jobs.

KRA, undeterred, said the new system will enable more entrepreneurs to pay their tax obligations.

“Kenya Revenue Authority (KRA) would like to remind the public that all persons carrying on business including those in the Informal Sector and Small Businesses are required to electronically generate and transmit their invoices to KRA via the electronic Tax Invoice Management System (eTIMS),” said KRA in a statement.

“KRA remains committed to continue supporting and facilitating all taxpayers to comply with the requirements of the law by adopting a facilitative and collaborative approach to tax compliance.”

The new system can be accessed via the e-Citizen platform but also entry-level phones.

Simple solution

“To this end, we have availed eTIMS simplified solutions dubbed “eTIMS Lite” for non-VAT registered taxpayers. These solutions are accessible through the eCitizen platforms via *222# for the USSD invoicing solution and ecitizen.kra.go.ke for the web-based invoicing solution,” said KRA.

The taxman has launched the system at a time when its plans to expand the tax bracket to the informal sector have come under scrutiny.

An earlier study by the Kenya National Bureau of Statistics (KNBS) showed close to half a million small enterprises in Kenya die annually as the business environment in the country gets bumpy.

According to a survey by the KNBS, approximately 400,000 micro, small and medium enterprises (MSMEs) did not get to celebrate their second anniversary raising concern over the sustainability of this critical sector.

Appearing before the National Assembly Finance Committee, KRA Commissioner General Humphrey Wattanga a few months ago conceded difficulties in bringing the informal economy into the tax net.

He cited the obscure nature of businesses in this sector and the absence of transparency in their financial transactions as major obstacles.

“Taxing the informal sector firms remains a challenge mainly due to the high administrative costs incurred by tax authorities, lack of financial statements by the enterprises and a large number of unregistered enterprises,” said Mr Wattanga in his presentation to the watchdog committee.

 The move, however, flies in the face of Treasury’s admission that increased taxes do not translate to higher collections.

President William Ruto’s top money man made this admission last week. National Treasury Cabinet Secretary Njuguna Ndung’u made the revealing comments on Tuesday evening last week during an International Monetary Fund (IMF) virtual forum where he was a panellist.  

The comments by Prof Ndung’u, a former Central Bank of Kenya governor, who published several papers on taxes and the economy before he assumed his current role have shone a fresh spotlight on the fiscal strategy of the Ruto Government which has introduced a raft of new taxes amid protests from consumers. 

Experts have often insisted the slew of new taxes by the Ruto government might not have the intended impact of increasing tax revenues and that instead, the government should instead grow the tax base. 

The Opposition and various consumer groups have opposed the slew of new taxes as punitive in a battered and stagnating economy. 

In some instances, tax experts say, the government should consider reducing taxes to boost businesses as well as the spending power of Kenyans, a move they say can help the economy that is reeling from multiple shocks including high energy and food costs, the Ukraine economic fallout and the Covid-19 aftershocks that have had the impact of increasing the cost of living. 

“Kenya has some of the highest tax rates in the world. Our income tax brackets have pretty much stayed the same since early 2000. The highest tax rate of 30 per cent is applicable to all income above $250 per month at the current exchange rate.

“When the tendency is to tax every possible aspect of life, there is hardly any disposable income left for people to spur demand and create growth,” Kunal Ajmera, the chief operating officer at Grant Thornton, a consultancy firm said earlier. 

“While no revision has taken place in our tax brackets, the countries world over are lowering the tax rates and enabling people to save and spend more. In a recent budget announced in India, all personal income up to 700,000 Indian Rupees, that is approximately Sh1.1 million per annum was tax exempted.” 

“Reducing marginal tax rates to spur economic growth is a commonly used policy with the notion that lower tax rates will give people more after-tax income that could be used to buy more goods and services.” 

Speaking during the forum dubbed, IMF African Fiscal Forum Prof Ndungu alluded to the principle by American economist Arthur Laffer, who argues lower tax rates change people’s behaviour and stimulate economic growth, creating more tax revenue for the government, not less. 

Tax reforms

Ndung’u however maintained the Ruto government was firmly focused on instituting tax reforms to bring tax equity and broaden the tax base.   

“The first brutal point is to say that with the current system, the current tax system, and even the way we are conducting our fiscal policy, we cannot raise adequate revenues beyond 14.1 per cent of GDP, even if we get a vibrant economy, because in a sense, somehow, somewhere is a combination of both technical issues as well as political issues.”

“The first thing is actually to say that. The domestic resource mobilisation must be couched in a way that it also reflects the economic structure and it should change with the economic structure. The moment you fail and you are left behind then it means that  it is going to be extremely difficult for you to catch up.” 

Prof Ndungu also said that higher taxes would be generated in a growing economy and not a battered economy. 

“The second point is that we need economic recovery for us to generate even higher taxes because the current economic structure and the vibrancy of the economy is so low to support added tax,” he said. He however maintained that ongoing reforms would ensure equity in payment of taxes. 

American economist Laffer is sometimes referred to as the “father of supply-side economics” and his philosophy on taxes became known as “The Laffer Curve.”

Backers of his philosophy credit Laffer with helping to spur income tax reductions around the world and boosting national economies as a result. 

Critics including the IMF however say the tax cuts he has espoused over the years have not produced the promised results and have instead contributed to growing income inequality and soaring budget deficits.

Laffer said earlier he did not invent the Laffer Curve and quoted economist John Maynard Keynes in summarising it. “Given sufficient time to gather the fruit, a reduction of taxation will run a better chance than an increase of balancing the budget,” he said earlier.