MSMEs key to State's plan to expand the tax base

George Mokua, Chairman Institute of Certified Public Accountants of Kenya.

Micro, Small and Medium Enterprises (MSMEs) are engines of growth.

Micro enterprises have less than 10 employees, small enterprises have 10-49 employees, while medium-sized enterprises have 50-49 employees with annual turnovers estimated at less than Sh10 million, Sh50 million and less than Sh100 million respectively.

They have been recognised by multilateral organisations, development agencies and governments across the world as key enablers of economic growth and development.

In Kenya, MSMEs make a substantial contribution to livelihoods and overall economic growth.

It is estimated that there are over 7.4 million MSMEs in Kenya, employing about 14.1 million people, which account for 93 per cent of the total labour force.

MSMEs account for 24 per cent of the Gross Domestic Product (GDP), with Micro enterprises alone accounting for 12 per cent of GDP and Small Enterprises accounting for 11 per cent of GDP.

The above notwithstanding, the contribution of MSMEs in the country to GDP is lower than that of South Africa (55%) and Malaysia (37%).

Statistics also indicate that there is high startup failure amongst MSMEs (the majority being from the manufacturing, trade, accommodation, and food service sectors) whereby about 2.2 million MSEs close within five years of their establishment and about 46 per cent not making it past their first birthday.

The most cited reason for this situation includes the high cost of credit finance and market access constraints which account for about 50 per cent of the closure, the high cost of raw materials and the lack of government incentives that encourage entrepreneurship.

A further interrogation into these alludes to their informality nature as the main reason behind the closure.

Informality limits access to market, finance, electricity, water and other public services. In turn, this implies revenue and welfare loss to the government and the citizenry formally employed in the sub-sector respectively.

The Kenya Revenue Authority (KRA) revenue collection for the FY 2021/22 stands at approximately Sh1.92 trillion from Sg1.56 trillion recorded in the 2020/21 financial year.

The government projects to collect about 2.2 trillion Kenya shillings in the current financial year. However, this is measured against the growth of the economy, at about 15 per cent, the growth is lower compared to other sub-Saharan countries, including South Africa.

Statistics further show that Kenya has continued to rely on a small pool of taxpayers. According to KRA's 2018/19 performance report, Kenya has about 8 million registered taxpayers.

Out of these registered taxpayers, only 3.8 million filed tax returns in the same period including corporate entities.

This implies that out of a population of about 47 million people, about eight per cent of the population is contributing to Income tax.

The aftermath of the low tax revenue collection by KRA has been an increase in the fiscal gap which has subsequently led to increased borrowing. Indeed, the Country is now ranked among those at a high risk of public debt distress.

The government has proposed various measures to broaden the tax base including fully rolling out the electronic Tax Invoice Management System (eTIMS), which is expected to reduce the Value Added Tax (VAT) gap from 38.9 per cent to 19.8 per cent potential.

It has also proposed integrating the Kenya Revenue Authority's (KRA) tax system with the Telecommunication companies (Telcos), mapping rental properties to implement rental income tax measures by enhancing field data analysis mopping up, integrating itax with National Lands Information Management System and the use of mobile applications.

The government also intends to expand the tax base by netting the informal sector into the tax bracket, the majority of whom are the MSMEs.

Further, the National Treasury noted that the potential taxable base of the informal sector is Sh2.8 billion.

This buttresses the need to address the challenges impeding MSMEs' development by designing strategies and policy interventions to allow them to tap into existing and emerging opportunities.

One way to broaden the tax bracket is by formalizing the sub-sector, a matter that most of them (53%) are willing to comply with. This is according to the 2016 World Bank survey report of informal enterprises in Kenya on registration.

The process of formalisation includes obtaining licenses, registering with Business Registration Services (BRS) and compliance with statutory requirements such as declaring taxable income by filing tax annual tax returns, social security declarations and compliance with labour laws.

The Report, however, notes that the main reasons for not registering to include tax compliance post-registration, high costs of registration, low perceived benefits from registration, inspections and meetings, and bribes.

Addressing these challenges faced by MSMEs is one sure way of incentivising them and luring them into the tax net which will ultimately expand the tax base.

This can be achieved through various ways including harmonising taxes to reduce the multiplicity of taxes both at national and subnational levels, providing tax education for taxpayers to understand the need for tax payment, simplifying taxes to enhance uptake of taxes such as turnover tax - which is still low - and leveraging on technology to integrate government and private sector systems.

According to the Economic Survey 2022, the employment stock as of 30th June 2021 of wage earners excluding small-scale agriculture and pastoralist activities stood at 18,332,800 persons in different sectors.

Of these, 217,300 were involved by the private sector in construction. It is further estimated that 350,000 Kenyans are employed in the transport /matatu sector and 295,300 in wage-based agriculture who are not in the income tax bracket. These portents are a great tool to expand the tax base.

George Mokua, Chairman Institute of Certified Public Accountants of Kenya.

[email protected]

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