Tax authority loses Sh200 billion to informal sector
Kenya Revenue Authority headquarters at Times Tower in Nairobi. The taxman is said to have lost Sh200 billion to the informal sector in the past three years. Photo/File
The Kenya Revenue Authority (KRA) has lost more than Sh200 billion in three years due to government’s inability to tax the informal sector, the Parliamentary Budget Office has said.
Martin Masinde, a fiscal analyst with the Parliamentary Budget Office, said on Tuesday the government lost Sh63.5 billion, Sh69.73 billion and Sh79.27 billion in 2006, 2007 and 2008 respectively to the informal sector.
He was making a presentation titled, ‘Informal Sector and Taxation in Kenya: Issues and Policy Options’ at a pre-budget stakeholders’ workshop.
Revenue authorities, he said, tend to focus on the formal sector, which is easier to tax, encouraging taxpayers to shift to the informal sector to avoid the taxman.
As more taxpayers escape the tax net, they leave the burden of financing the national budget to the few workers in formal employment.
“If the underground economy remains untaxed, the government will continue losing billions of shillings in terms of revenue and as more people move into the informal sector to escape the burdensome taxation, it will become increasingly difficult for the government to hit its revenue targets,” said Mr Masinde.
Mr Peter Churchill Ogutu of the National Informal Sector Coalition said that a booming and tax-free informal sector is a threat to the formal sector, the main source of revenue for the government.
The informal sector, Mr Ogutu said, crowds out formal businesses since by avoiding taxes they offer lower prices on goods and services and thereby gain an unfair advantage.
“Unfair competition from non-registered businesses can reduce growth in the formal sector and market access of registered businesses,” he added.
The Treasury has proposed a Sh1.4 trillion national budget for the next financial year, the biggest in Kenya’s history.
The Budget is Sh300 billion more than last year’s and it takes into account increased spending on defence, and new offices and institutions under the new Constitution.
During his presentation, Mr Ogutu said that the complicated tax system, compliance costs and hurdles in the informal sector complicates taxation.
He also blamed the Kenya Revenue Authority (KRA) for the problem.
“Often the priority of a tax administration is to focus on large taxpayers because of the high delinquency rate and low revenue yields associated with small businesses with very little enforcement action,” said Mr Ogutu. “This only encourages non-compliance.”
He said given that Kenya is a cash economy, it makes it difficult to have proper accounting and auditing systems for taxation purposes.
The Institute of Economic Affairs, a local think tank, organised the pre-budget forum.
Participants argued that the biggest consumer of all — the government — could help to enlist the informal businesses and hence help the KRA widen its tax net.
