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KRA targets small traders with new MSME unit
Clients seek services at KRA headquarters in Nairobi on February 23, 2024. The KRA is banking on MSMEs, alongside the digital economy and agri-business sub-sectors, to grow active taxpayers to 13 million.
Photo credit: File | Wilfred Nyangaresi | Nation Media Group
The Kenya Revenue Authority (KRA) has created two departments in a fresh bid to widen its dragnet to the majority of small traders who have over the years been elusive in complying with various tax provisions, resulting in perennial shortfalls.
KRA Commissioner-General Humphrey Wattanga has created a stand-alone Micro and Small Taxpayers Department in a new development aimed at netting four million new taxpayers under its four-year plan ending June 2029.
Mr Wattanga has further created the Business Strategy Technology and Enterprise Modernisation Department which will leverage disruptive technology such as Artificial Intelligence (AI), Machine Learning (ML), and Data Analytics to not only simplify tax processes for businesses but also catch tax cheats.
Previously, there has been no dedicated office within the KRA for small traders, unlike the Large Taxpayers Office (LTO), Medium Taxpayers Office (MTO), and Public Sector Division (PSD).
The LTO, MTO, and PSD have also been consolidated into Large and Medium Taxpayers department in changes announced Friday.
The establishment of the department for small firms, which largely operate in an unregulated environment, is part of the recommendation of the MSME Tax Base Expansion that was set up by President William Ruto’s administration in 2023 to look at ways of enhancing compliance in the informal sector.
“The purpose of this differentiated setup is to enable the Authority to be more responsive to the taxpayers' needs and more effectively enhance tax base,” the chief taxman said in an internal memo seen by the Business Daily.
A department within KRA is usually headed by a commissioner. The KRA statement was, however, not clear whether or not the MSMEs will now be under a commissioner, just like the border and control department that handles international trade.
The KRA is banking on MSMEs, alongside the digital economy and agri-business sub-sectors, to grow active taxpayers by four million to 13 million by the financial year 2028/2029 “through tailored support frameworks that bolster tax compliance”.
“The adoption of modern technology is going to be a game-changer for KRA. The Authority will leverage disruptive technology such as Artificial Intelligence (AI), Machine Learning (ML), and Data Analytics to deliver tools that enable market-customised solutions,” Mr Wattanga told this publication late last year.
He added: “These technologies will not only reshape how KRA approaches compliance by modernising tax processes but also help improve customer experience and service quality, identify potential revenue loopholes by relying on data, and enhance the integrity of the tax system.”
KRA has listed small traders in informal settings, alongside landlords and high net-worth individuals, as hard-to-tax sectors despite having high potential for expanding the taxpayer base and growing revenue, signifying the tough task ahead.
This has come at a time when banks have started asking micro, small, and medium enterprises (MSMEs) to provide personal details of their beneficial owners such as names, physical addresses, PINs, source of income, current occupation, and water or electricity bills in line with new anti-money laundering rules that became effective in November.
The small traders must also provide their audited accounts or key in expenses and income using a template provided by the banks in a fresh clampdown on suspicious transactions under the rules.
Micro businesses such as salons, bars, and corner shops are also liable for fines of Sh500,000 and a daily penalty of Sh50,000 for the days in breach since November 24, when the new regulations took effect.
“Not all SMEs will be required to provide beneficial ownership information. This is only for those with business registration,” the Kenya Bankers Association (KBA) said in January.
However, the requirement for all the registered businesses, including MSMEs, to disclose financial and beneficial ownership information has left most of the small enterprises in a catch-22, with some fearing it might be a ploy by the government to illegally access their income for taxation purposes.
The disclosures are expected to open the window for the KRA, security agencies, and the Financial Reporting Centre to tap the information to track money launderers, corrupt individuals, and tax cheats. In the past, senior government officials have used little-known entities, which they own but are registered under different names, to embezzle cash from the public coffers.
KRA netted Sh1.37 trillion in total revenue collections in the first six months of the current financial year, missing the target by Sh62.8 billion.
The main contributor to this under-performance was Value Added Tax, which collected Sh304.08 billion, missing the target by Sh36.51 billion. Pay-As-You-Earn was the second largest contributor to the revenue shortfall in the first six months of the current financial year, having mobilised Sh275.9 billion, missing the target by Sh21.33 billion.
