Taxes from SME sector increase with new policies

The small and medium enterprise sector is growing fast and it is now being seen as the force behind the increasing number of new tax payers, a move that has helped grow government revenue.

According to the tax collector—the Kenya Revenue Authority (KRA)— the country has recorded an additional 409,000 taxpayers since January when cyber cafes were roped into the online registration of taxpayers across the country.

“Given their expansive network covering the entire country, they can be an effective vehicle through which taxpayers countrywide can access our online services,” says Mr Kennedy Onyonyi, the senior deputy commissioner in charge of marketing and communication department.

Another factor that has contributed to the increase in government revenue generated from the SME sector is the introduction of turnover tax in January 2008.

The tax which targets small and medium businesses with annual turnover of between Sh500,000 and Sh5 million is an indirect tax chargeable at the rate of three per cent of a business’ total sales.

With the growth in the number of medium and small enterprises in manufacturing, retail trade, car repair and education over the past years, more revenue has been generated.

Businesses targeted by turnover tax include family-owned businesses, partnerships and limited companies.

The turnover tax has been responsible for about Sh1 billion into Treasury coffers.

Turnover tax is intended at bringing in the informal sector into the tax bracket.

These include small-scale manufacturing firms, Jua Kali, agricultural, transport and light manufacturing industries.

According to the Ministry of Trade, Kenya has about 1.6 million registered small and medium enterprises constituting about 96 per cent of all business enterprises in the country.

The small businesses employ about 5.1 million people accounting for 75 per cent of the total labour force and contribute 20 per cent to Kenya’s gross domestic product.

These are the numbers that KRA are relying on to increase tax contributions.

The increasing number of SMEs offer new tax sources while the number of increasing workers also offer new taxpayers to KRA which targets to collect a total Sh545.2 billion for the 2009/2010 financial year up from Sh480.6 billion in the 2008/2009 fiscal year

The robust returns by the revenue authority in its October-December 2009 quarter has put the taxman in the first lane to help Treasury meet its revenue target of Sh635.5 billion for 2010/2011 which looked a distant dream following a period of dismal revenue collections in 2009/2010 financial period.

The taxman collected Sh136.8 billion against a target of Sh134.3 billion in the October-December 2009 window—the institutions second quarter of the fiscal year 2009/2010 thereby putting it back to meeting targets.

In 2009, KRA largely failed to meet targets citing several reasons including the effects of the post-election violence of 2008.

The taxman is expected to collect Sh128.6 billion in the third quarter of 2009/2010 financial year representing the January-March 2010 window.

It is hoping to build on this performance to help the government meet its revenue estimates which has continued to grow owing to increasing expenditure.

According to the Budget Strategy Paper covering 2009-2012, the government estimates a further growth in revenue to Sh711.1 billion in the next three years to cover its increasing expenditure.

“The authority is optimistic of surpassing the third quarter target and ultimately exceeding the target for the financial year,” said Mr Michael Waweru, the Commissioner General of KRA when he released the October-December 2009 revenue figures.

But this can only be possible if KRA increased the exposure of its services through the use of information communication technology which is readily being offered by the many cyber cafes across the country.

In an effort to ensure convenient access to its online service, the revenue authority has embarked on a plan to collaborate with cyber café countrywide.

KRA has put in place an elaborate plan to train cyber cafes’ to build their capacity to handle online services.

The first training programmes which brought together participants from across the country representing over 400 cyber cafes from all over the country was held on Tuesday the March 4th 2010. The training is going to be rolled out to regions in due course.

Since KRA launched its online services in December 2008, 724,575 online service users have been registered.

Out of this number 408,898 are newly registered taxpayers.

Tax returns

“It is therefore evident that since online services were introduced more new taxpayers are voluntarily registering. The number of newly registered taxpayers is increasing continuously. Currently, an average of 30,000 new taxpayers are registered monthly. In the months of December, January and February, 36,429, 39,204, and 40,344 new taxpayers were registered respectively. In addition, an average of 8,200 existing taxpayers have been registering monthly as online users over the last 14 months,” says KRA.

According to KRA, the online registration has registered tremendous success, however online filing of returns has not realised a similar measure of success.

An average of 8,400 value added taxes (VAT) returns are filed electronically monthly. PAYE online filing is over 1,000 returns monthly.

Although progress made in filing of returns is within the norms of the tax administrations which have introduced such services, the potential for filing is enormous.