It's time to harness informal sector’s revenue potential

Tinsmiths at work at their workshop in Kibuye market. [Denish Ochieng, Standard]

For years now, the informal sector has been a key economic hub in many parts of the world. As various findings have put it, the economic contribution of the informal sector in most developing countries’ Gross Domestic Product (GDP) is substantial. Apart from that the informal sector is one of the biggest employers in Kenya. According to an article published by the Institute of Economic Affairs in 2016 titled ‘Economic Burden of the Informal Sector’, the sector accounts for over 80 per cent of employment opportunities in Kenya.

Despite the tremendous potential, the sector has remained the taxman’s hardest nut to crack. Lack of formal structures and a tax framework that suits the sector have been major drawbacks in the taxman’s quest to tap revenue from this sector.

In light of this, the government has been keen to put in place a simpler taxation framework to enhance tax compliance in this sector. The government took a stab at the taxation of the informal sector by introducing a simpler tax regime known as presumptive tax. Presumptive tax is charged at a rate of 15 per cent of the single business permit or trade licence fee and payable upon application or renewal of the licence. Unlike other taxes, presumptive tax is a final tax and does not require filing of a tax return thereby making it simpler to comply with. At the point of implementation, the threshold to qualify for presumptive tax was an annual turnover of Sh5 million and below.  

Implementation of presumptive tax phased out Turnover Tax (ToT). ToT was first introduced in the Kenyan taxation framework in 2007 with a view to tap revenue from the informal sector.

Although Kenya has made significant strides towards simplification of taxation of the informal sector such as the introduction of presumptive tax, we are yet to achieve the ultimate goal. It is for this reason that through the Finance Act 2019, the government has reintroduced ToT to enhance tax compliance in the informal sector. Following reintroduction of ToT, the annual threshold for a business venture to qualify for presumptive tax will be Sh500,000 and below.

In the case where a given business qualifies for both presumptive tax and ToT, the presumptive tax paid will be used to offset the ToT payable. The reintroduced ToT is payable monthly at the rate of three per cent on the gross turnover in the month.

Coupling ToT with Presumptive Tax is a tremendous and promising step towards comprehensive revenue streamlining of the informal sector. To further enhance tax compliance levels in the informal sector, the Kenya Revenue Authority (KRA) has put in place an elaborate tax education framework specially tailored to meet the needs of the sector.

With presumptive tax, ToT and tax education now in place, KRA is upbeat that the taxation landscape of the informal sector is set to change for the good.

The benefits resulting from full compliance by the informal sector cannot be overstated. First and most important, it will have a significant impact on KRA’s tax-base expansion endeavours. Compliance by the sector means more revenue for the government.

Secondly, a clean tax record is a pedestal to the  prosperity of any business. No business enterprise worth its salt would risk doing business with a non-compliant business partner. High levels of tax compliance therefore open up more opportunities to trade with even government and non-governmental bodies, hence more returns. The authority and the government will continue exploring more avenues of simplifying tax administration in the informal sector until the sector’s full potential is felt in the national revenue coffers. KRA therefore calls on all sector players to take this patriotic duty positively for a better Kenya.  

- The writer is the Commissioner of Domestic Taxes at the Kenya Revenue Authority (KRA).