Tax is the main source of revenue for the government’s development projects and recurrent expenditure financing. However, tax compliance among small and medium enterprises (SMEs) is poor.
SMEs have long been recognised as a priority sector for growth and development in Kenya with more than 70 percent of the gross domestic product (GDP) under SMEs’ control. They play a critical role in achieving targeted rates for economic growth and employment figures.
SMEs are key to mobilising domestic savings for investment, appreciable contribution to the GDP, increased harnessing of local raw materials, job creation, and significant contribution to poverty reduction efforts through sustainable livelihoods and enhancement in personnel income, technological development and export diversification.
Furthermore, they have the advantage of reaching the farthest corners of Kenya, unlike the larger establishments. For this reason, an ideal tax policy needs to be adopted to ensure voluntary compliance, economic growth, and proper utilisation of resources rather than suffocating the entrepreneur initiative they are out to cater for.
Most large companies have their roots in small and medium enterprises suggesting that the future large corporations are the SMEs of today that must be nurtured to ensure their growth.
Therefore, SMEs are generally perceived to be the seedbed for indigenous entrepreneurship and generate many small investments, which would otherwise not have taken place.
SMEs, being profit-generating establishments, are also expected to pay their tax dues.
The important question however is how much tax should they be levied? Small and medium enterprises are volatile establishments that need special treatment. Putting their nature into consideration, every little resource at their disposal can make a world of difference.
For this reason, several Kenyan SMEs choose to remain in the informal sector because they feel the cost of compliance is too high. And a considerable number of those that pay only do so because the authorities coerce.
For many years, Kenya has continuously broadened its tax base among small and medium businesses and various legislative measures are enacted to provide preferential tax treatment to them such as TOT and voluntary tax declaration.
High tax rates and complex filing procedures are the most crucial factors causing the non-compliance of SMEs.
Other factors like multiple taxations and a lack of proper enlightenment affect tax compliance among SMEs.
Therefore, the SMEs should be levied a lower percentage of taxes to allow enough funds for business development and better chances of survival in a competitive market.
The government should also consider increasing tax incentives such as exemptions and holidays as these will not only encourage voluntary compliance but also attract investors who are potentially viable taxpayers in the future.
However, despite this progress, taxpayer education and the cost of tax compliance remains a significant challenge for SMEs, as they often simply do not have the necessary staff resources and skills to timeously and fully comply with all their tax obligations.
Tax compliance can add significantly to the cost of doing business for SMEs for example, additional resources that have to be employed to comply with tax rules, and significant penalties imposed for non-compliance with tax rules.
Therefore, Kenya needs to spur the development of the private sector by creating an environment favourable to the growth of SMEs, strengthening the factors that lead to business success, and addressing the problems threatening the existence and advancement of small and medium, so they can adequately play the role expected of them in economic transformation.
Since the individual SME pays a very small amount of tax compared to what the larger establishment would part with, tax authorities tend to give the larger corporations more attention.
This means a good number of SMEs get away with not paying their taxes hence revenue that would otherwise have been invested in development projects that will end up being of benefit even to the SMEs is lost.
This is a situation that needs to be corrected for the SMEs to play their role in financing the government expenditure as it is the largest player in the economy.