The government has set its sights on higher tax collections from micro-enterprises with a new proposal to lower the turnover tax limit to Sh500,000 in fresh efforts to rope in more small traders.
The threshold has been slashed from Sh1 million while the upper limit has been reduced from Sh50 million to Sh15 million, pushing other small traders to pay the 30 percent taxes on profits or corporate tax.
Turnover tax (TOT) or sales tax is charged at one percent of small traders' tax, including additional small traders in the bracket is expected to saddle micro-enterprises, who have raised concerns about deteriorating business conditions, with extra operating costs.
“Section 12C of the Income Tax Act is amended in subsection 1, by deleting the words ‘one million shillings but not exceed or is not expected to exceed fifty million shillings’ and substituting therefor ‘five hundred thousand shillings but does not exceed or is not expected to exceed fifteen million shillings,” reads the proposal.
It is also expected to provide the Kenya Revenue Authority (KRA), under pressure to collect additional revenue, with a fresh avenue for raising taxes from small traders, a majority of whom have not been paying State levies.
The Treasury had in 2018 dropped the turnover tax due to its poor performance as most traders failed to make revenue disclosures.
It replaced the sales levy with a presumptive tax at the rate of 15 percent of the single business permit fee issued by county governments when renewing their permits.
The tax allowed KRA to gather additional data on small traders, setting the stage for the return of the turnover tax.
The informal sector, popularly known as Jua Kali, is deemed to have limited contact with the taxation system save for indirect consumption levies and Ruto’s administration is banking on the turnover to plug revenue loopholes.
The adjustment to the TOT thresholds aligns with the government’s ambition to mobilise at least Sh2.8 trillion from micro, small and medium enterprises.
“The potential taxable base of the informal sector is Sh2.8 trillion as per the MSME survey,” the National Treasury stated in the 2023 Budget Policy Statement.
KRA’s analysis ahead of the introduction of the presumptive tax in 2018 indicated that some 1.56 million taxpayers with single business permits had not registered under the turnover tax regime.
Micro- and small-sized businesses remain the backbone of the Kenyan economy and the largest contributor of new jobs despite largely operating in informal settings.
For instance, the informal sector accounted for 707, 300 or 80.6 percent, of the 816, 600 new jobs created last year, the Economic Survey 2023 shows.
But small traders have suffered from modest economic activity that has cut cash flow and hit business sales.
Kenya’s economy grew 4.8 percent last year, down from 7.6 percent a year earlier, as a severe drought hurt agricultural output.
The economy also felt the effects of a weaker local currency and increased public debt load.
Corporate Kenya has witnessed reduced profitability that has ushered in job cuts, freezes in hiring and near-stagnant wages in the race to protect profit margins.