State sets sights on Sh2.8trn taxes from small businessesMonday January 23 2023
The government is eying a record Sh2.8 trillion from the Micro, Small and Medium Enterprises (MSMEs), raising fears that President William Ruto might deviate from his pro-small business campaign promise.
In the 2023 Draft Budget Policy Statement (BPS) the National Treasury noted plans for tax base expansion in the hard-to-tax informal sector, with a special focus on MSMEs.
“The potential taxable base of the informal sector is Sh2,800 billion as per the MSME survey,” said Treasury in the report.
KRA has been given a tax collection budget of Sh2.56 trillion in the Financial Year 2023/24, a target that is set to be raised to Sh4 trillion in the medium.
President Ruto has already directed KRA to ensure that every Kenyan adult is registered as a taxpayer, reflecting his intention to go after the ubiquitous informal sector, where earnings are largely erratic.
However, speaking in October last year during the KRA’s Taxpayers event, Dr Ruto regretted that there are only seven million people with KRA pin numbers, while Safaricom’s M-Pesa has 30 million registered customers, transacting billions daily.
“The fact that this opportunity remains unclear to KRA demonstrates why radical changes are necessary. Every Kenyan with an ID should have a PIN number,” said Ruto.
Read: Why most Kenyan SMEs are non-tax compliant
Few businesses and individuals, mostly those in the formal sector, have been paying taxes, raising concerns about an unfair tax regime where a few carry a heavier tax burden.
Moreover, whenever the business environment is depressed, collection of income tax, a major revenue stream for the Treasury, dips a situation that was witnessed in the five months to November last year when KRA missed its target for taxes on profits and salaries by Sh32 billion.
Small businesses, with a gross annual turnover of more than Sh1 million but less than Sh50 million, are supposed to pay a turnover tax of 1 per cent on their monthly sales.
However, KRA has struggled to recruit taxpayers, with plans to plug into county governments’ systems for registered businesses, failing.
As part of its objective of stimulating inclusive growth, the Principle Secretary for National Treasury Dr Chris Kiptoo recently said that the government would “implement a favourable tax regime” for MSMEs.
President Ruto’s administration, which came to power on the promise of giving small businesses a conducive environment, including offering them a fair tax regime, is divided between expanding the tax base to the so-called ‘hustlers’ or forcing them to pay taxes like any other Kenyan.
In the report, the National Treasury reckons that MSMEs contribute significantly to the economy, employing about 85 percent of non-farm jobs.
Read: Kenya's erratic tax changes harm business, economy
As a result, said Treasury, the government unveiled the Hustler Fund, after years of MSMEs being denied cheap credit to help them grow.
“The Government is committed to ensuring Kenyans access affordable credit. Towards this end, the Government will commit resources every year to provide MSMEs with access to the fund through SACCOs, venture capital, equity funds and long-term debt for start-up and growth-oriented SMEs,” said Treasury.
President William Ruto has given KRA a target of Sh2.56 trillion in the Financial Year 2023/24, a target that is set to be raised to Sh4 trillion in the medium term even as he tries to reduce the country’s debt appetite amidst rising expenditure needs occasioned by a slowdown in the economy.
In total, the Kenya Kwanza government plans to spend a total of Sh3.48 trillion starting July.
This is an increase from a budget of Sh3.3 trillion for the current financial year ending June.
Much of this money, 63.1 per cent, will be spent by the three arms of government—Executive, Parliament and Judiciary—with county governments and consolidated fund services sharing the remaining 36.9 per cent.
Financing of this budget will be through revenues, taxes and ministerial fees and commissions, amounting to Sh2.9 trillion, up from Sh2.5 trillion in the Financial Year 2022/23.
“Revenue performance will be underpinned by the ongoing reforms in tax policy and revenue administration measures geared towards expanding the tax base,” reads part of the BPS.