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Ideas & Debate

Help our informal sector take baby steps to paying tax

The informal economy has been a theme of mine this year and even more so since the budget speech. The government seems to have caught on to the financial potential of tapping into this sector for revenue generation purposes, and understandably so. 

The informal economy is estimated to contribute between 34 to 35 per cent of the country’s gross domestic product (GDP) and currently generates over 80 per cent of jobs created in the country on an annual basis.

My concern is that what will happen is a heavy handed reflex action from government to over-regulate and intimidate informal economy players into paying taxes.

I think this would be the wrong approach due to several reasons.

Firstly, the Kenya Revenue Authority (KRA) has already taken a step in the right direction by introducing iTax and making it easier for individuals and businesses to pay taxes.

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As a result, some informal economy players who found the tax process too difficult to comply with voluntarily registered and started paying taxes. 

Another useful initiative by the KRA to facilitate tax compliance is working with county governments to recruit informal economy businesses who have established business premises such as in malls or office buildings, to pay taxes. To be clear, there is a difference between facilitating compliance and intimidating people and businesses into it. 

Thus I think the KRA should continue to focus on facilitating tax compliance and scaling up their efforts on sensitising the general public on how to file taxes as well the benefits of doing so; benefits such as having a paper trail of tax compliance that make it easier for small businesses to qualify for financing or become suppliers for government contracts. 

Secondly, there should be a distinct effort by government to improve the efficiency, productivity and profitability of the informal economy.

As it stands, informality tends to overlap with poverty and low income.

Due to the fact that it is often the poorly skilled who find themselves stuck in the informal economy as the qualifications for employment in the formal economy often serve as automatic disqualifiers, informal economy players need to be supported in building their ability to manage and scale up their businesses, as well as make their businesses more profitable. 

Therefore, government bodies should work with county governments to seek input from informal economy players on the factors they think constrain the growth of their businesses.

There is already a sense that training in areas such as bookkeeping, business management, and market access strategies would be valuable for this sector. 

Thus rather than aiming to squeeze out as much as possible from a sector that is still largely defined by poverty, the government should support informal businesses to become more profitable.

This would likely make the sector more willing to pay taxes because: as it stands, most feel they are too broke to pay taxes as they are already struggling to get by. 

Finally, the State should give tax amnesties to informal businesses that register and start the journey towards tax compliance. At least a three to five year tax amnesty period is proper.

The reason why this amnesty is so important is that it not only allows small businesses to develop the capacity to comply, but also provides a time period over which support to the informal businesses, such as that detailed above, can be deployed.

This amnesty would also allow the State to collect much needed information and data on the informal economy. It could then, for example, use such data to establish realistic tax bands for small businesses. 

In short, the informal economy is too valuable a sector to be intimidated out of existence or pushed further underground by threats of punishment for failure to comply with tax obligations.

The KRA and other arms of government should work to support players to become more profitable. Only then can a realistic conversation about more robust tax compliance occur.

Ms Were is a development economist, [email protected]

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