Forcing tax on informal business bad policy idea

Last week, the Kenya Revenue Authority (KRA) announced that informal traders will be required to log on to its iTax platform and pay the presumptive tax before county governments can renew their business permits for next year. This means those who do not pay the tax will not have their single business permits or trading licences renewed in January.

While it may look like this move is inspired by the KRA, it is actually an initiative of the National Treasury which is facing pressure to raise more revenue to meet debt obligations in particular. But it is problematic for several reasons.

First, a key motivation for informality is the tax burden. Informal businesses engage in subsistence business activity, barely able to meet their financial needs let alone tax obligations. The reality is that functioning as a formal business entity is expensive and most Kenyans simply cannot afford the costs linked to formality.

It would be more prudent for the Treasury to support what other arms of government such as the Ministry of Industry are doing to improve the performance of informal business so that they are more profitable in the long-run and in a stronger position to pay tax. Slapping new tax on businesses that are barely staying afloat is insensitive and imprudent and will engender resistance to this move across the country.

Secondly, it is not clear what informal business will get in return for tax compliance. Almost without exception, informal businesses operate in poor quality and insecure physical spaces with no access to decent roads, water and sanitation facilities, electricity or even permanent physical structures. Will paying the presumptive tax change this or will informal businesses have tax eat into their income with no related improvement in their operating environment? Without a clear demonstration of the return informal businesses will get for compliance, there will be little motivation to comply.

Thirdly, this move will antagonise rather than support the sector that is the biggest employer in Kenya. As of 2017, over 14 million Kenyans earned a living in the informal sector. New taxes will place new financial pressure on millions of Kenyans who earn a living in a very difficult environment. In addition to serious problems with physical work space, those who work in the informal sector have lower quality jobs and are more vulnerable to job loss.

In trying to force tax compliance without addressing the serious challenges informal businesses face in trying to earn a living, the government signals it is out of touch with the reality of most Kenyans.

Finally, Kenya’s fiscal space makes it clear that the move to tax the informal sector is informed more by the need to pay Treasury’s debt binge than improve service delivery to Kenyans. Kenyans are being punished for what has clearly been unsustainable fiscal strategy. The focus of the Treasury should be to redress its fiscal missteps, ramp down on expenditure increases, and make sure that public funds are used for their intended purposes.

The Kenyan public continues to air its deep concerns with the mismanagement of public funds and forcing the hands of millions of Kenyans to pay taxes when most feel the government is not financially accountable to them is unwise. One will likely find that Kenyans will be more willing to pay tax if they are assured they will benefit from compliance rather than public funds being siphoned in illegal and corrupt activity.

In short, this move to enforce tax compliance is a bad idea. It will antagonise millions of Kenyans while failing to address the real problem of unsustainable fiscal policy.