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Traders risk jail terms and fines for failing to use e-tax registers

New rules require business entities to seek KRA assistance within 24 hours if the ETR systems malfunction. [iStockphoto]

Kenyan traders who refuse to utilise government-sanctioned electronic tax registers for their daily business transactions now risk imprisonment and significant fines.

The Ruto administration is intensifying its fight against tax evasion by implementing new tough regulations that govern the use of upgraded electronic tax registers (ETRs).

These registers collect data from all traders, individuals, and companies in the country in almost real-time - tightening the grip on tax evaders.

According to the new stringent regulations published by National Treasury Cabinet Secretary Njuguna Ndung’u yesterday, individual traders and all business entities must now seek assistance from the Kenya Revenue Authority (KRA) if the ETR systems malfunction within 24 hours.

This stringent requirement highlights the government’s suspicion that some traders may attempt to evade taxes by avoiding the use of these devices which require the internet to function. KRA relies on monitoring electronic or formal payments to obtain information on taxpayers’ financial transactions with banks and other institutions. 

By analysing this data using algorithms, the taxman can generate taxpayer risk profiles and enhance compliance. Furthermore, electronic invoicing systems will facilitate reconciliations to ensure accurate reporting of sales and profits.

Potential transition

However, a documented decline in tax compliance in recent months has pointed to a potential transition towards an underground economy, analysts say.

A spot check by Weekend in Business yesterday revealed that some traders have resorted to abandoning electronic payment methods such as mobile money to avoid increased tax compliance.

The new regulations by the Treasury said: “A person commits an offence if the person fails to comply with any provisions of these regulations; or tampers, manipulates or interferes with the proper functioning of the system including uninstallation and change of the device without notifying the Commissioner.”

The Kenya Kwanza government recently acknowledged its inability to gather taxes from the informal economy, which includes small-scale traders, shops, and other businesses that have managed to avoid paying taxes for a long time.

The frank admission by the taxman highlighted the difficulties the Ruto government is facing in generating tax revenue, amid its current pressing financial needs. Treasury yesterday also cleared the path for the introduction of the turnover tax, which had previously been unsuccessful due to the majority of traders neglecting to disclose their revenue.

“Any resident person whose income from business exceeds one million shillings but does not exceed or is not expected to exceed twenty-five million shillings in a year of income shall be liable to pay turnover tax,” said the regulations signed by the CS.

The additional taxes imposed on informal traders are anticipated to burden small-scale traders, who have expressed worries about the worsening business environment.

Yesterday, experts issued a warning that local traders are confronted with a substantial financial burden when conducting business due to the anticipated crackdown by the KRA.

Nikhil Hira, a tax specialist and business associate at Kody Africa LLP expressed concern that informal businesses, which constitute more than 60 per cent of trade, are at risk of exclusion from the formal sector.

Additionally, both traders and enterprises will be unable to claim any deductions on their income or corporate taxes.

“A person who commits an offence under these regulations shall be liable to pay the penalty specified under Section 86 of the Act,” said the new regulations on ETRs. The section prescribes a penalty of Sh100,000.

Failure to install upgraded electronic tax registers (ETRs) at a premise could result in Kenyan manufacturers and traders facing a fine of Sh1 million or a jail term of three years.

Traders and enterprises also forfeit any opportunity to deduct income or corporate tax if they bypass the ETR system.  

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