Columnists

Adopting cashless economy can help rein in tax evaders

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A parking attendant captures payment details of a motorist in Nyeri town. Most county governments have introduced cashless payment systems to enhance efficiency in revenue collection. PHOTO | JOSEPH KANYI | NMG

Recent studies estimate that the average size of the shadow economies, especially in developing countries, is quite huge - approximately 40 per cent of the official Gross Domestic Products (GDP).

The shadow economy refers to all work activity and business transaction that occur ‘below the radar’ – economic activity that is undeclared. Historically, shadow economies are known to thrive within cash-based economies.

The existence of shadow economies poses a huge hurdle for tax authorities owing to their inherent lack of systems and structures.

As a result, this subverts the equity principle in taxation consequently undermining the stability of revenue collection owing to the informal sector income that goes untaxed.

Kenya, the East African economic powerhouse, is largely a cash-based economy. Most of these transactions are predominant in the informal sector (Jua Kali sector). While collection of taxes from the informal sector has been a challenge in the past, the Income Tax Bill proposes to introduce a 15 per cent tax on the value of the business permit fee payable at the point of applying or renewing the permit.

This tax seems to be targeting Jua Kali businesses. Mobile-based transactions have become the norm and if well harnessed, present an opportunity for tax authorities to access this elusive segment. Further, through the immensely successful mobile money transfer services, telecommunication firms and financial service providers have managed to penetrate the informal sector leaving a footprint of valuable information that can be leveraged to create an operational tax system for this segment.

Mobile money platforms remain the most accessible form of cashless platforms in Kenya. The platforms have largely contributed to financial inclusion especially for the low income earners.

Financial inclusion means that financial products and services for all are easily accessible and are geared towards meeting their needs. These range from being able to conveniently and sustainably perform transactions, savings, payments, access to credit and insurance.

READ: Sharp drop in cash use among Kenyans, thanks to technology

To business owners online mobile processing platforms curb revenue pilferage through elimination of physical cash handling but to policy makers they aid in tracking illicit economic activities such as money laundering. Currently, the national government and various county governments have also embraced digital and mobile platforms as their preferred form of service delivery to Kenyans.

These services include; application and renewal of passports, renewal of driving licences, paying for parking, vehicle transfer and searches et al. The cashless option also provides a ready avenue for obtaining relevant data to the various government departments on the performance of the economy.

The policy makers can thus analyse the dynamics of the economy in a superior way thus develop appropriate policies based on accurate information. Cashless economy work well for the tax authorities all over the world.

Since the physical exchange of cash, coins or notes, is basically minimized, there is a paper trail for the tax authority to follow and perform a quick reconciliations of the taxes declared vis-à-vis what ought to have been paid.

Beth Muraya and Tonny Watuka, Tax specialists, EY