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SMEs hurt most by VAT revert to 16pc

By Awal Mohammed | Dec 8th 2020 | 2 min read
By Awal Mohammed | December 8th 2020

Small Medium Enterprise (SME's) stalls at the Market stalls along Kigali road in Nairobi. [Wilberforce Okwiri, Standard]

Phillip Masinga fakes a smile as he tries to woo passersby to his stand. The proprietor of FheelBeta nutritional products sells wheat-grass juice and wheatgrass powder products.

And today, he has come to try his luck at the Alchemist in Westlands, in an open market exhibition. “This year has been tough for me. Sales have drastically reduced and going to the festivities, we are afraid that our purchasing power has been reduced a lot,” said Mainga.

His situation mirrors thousands of small and medium enterprises (SMEs) dotted across the country that have been affected by the pandemic.

SMEs constitute the majority of businesses in Kenya, providing 30 per cent of jobs and contributing one-third of the gross domestic product (GDP).

To cushion the vulnerable, Treasury early this year lowered the turnover tax threshold to Sh1 million, which offered relief to small businesses. Reduction in value-added tax (VAT) from 16 per cent to 14 per cent was meant to make goods and services more affordable.

This, plus the 100 per cent tax relief for low-income earners was geared towards putting more money into the pockets of consumers - thus sustaining demand for goods and services.

“We are heading to a new year with all the incentives from the government withdrawn. As we speak, life is hard. Schools are reopening and the VAT has been revised back to 16 per cent. How are we going to survive yet our businesses are doing badly?” said Marlyne Musimi, a shop owner.

With the government keen on stimulating the economy through its Sh930 billion post-Covid-19 economic recovery strategy, the State has decided to end these tax reliefs.

Last week, National Treasury Cabinet Secretary Ukur Yatani announced that tax heads such as VAT and income tax paid by workers and employers would revert to their normal rates.

This follows an eight-month hiatus in which they were reduced to cushion businesses and individuals.

Mr Yatani said the decision to return the taxes to their pre-Covid level was informed by the loss of revenue, with Treasury having to forego Sh65 billion during the period.

This, plus tough business environment, saw the Kenya Revenue Authority (KRA) miss its tax collection target by Sh186.3 billion since March.

KRA Commissioner General Githii Mburu said the taxman collected Sh1.09 trillion against a target of Sh1.28 trillion in the eight months to November.

Co-founder of Somo, an entity that gives grants to small businesses Amelia Hopkins, said they received more application from SMEs this year.

“We have seen the number of application for grants alone double up. This points to tough economic conditions that the majority of SMEs are operating in,” said Hopkins.

Her sentiments are shared across the banking sector where there has been a jump in the uptake of the loans.

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