The contribution of the informal sector into the national tax kitty has not been in tandem with its size and its overall contribution to the Gross Domestic Product (GDP).
Numerous strategies deployed by the Kenya Revenue Authority (KRA) to bring the sector into the tax net have borne minimal returns.
This is despite some studies estimating that informal businesses account for 35-50 percent of the GDP in many developing countries.
The medium-term revenue strategy proposes among other methods of increasing tax compliance in the informal sector, the introduction of sector or location based presumptive tax that will take into consideration the unique nature of businesses to ensure equity and fairness.
Due to the unique operating models of certain segments of the informal sector, this could include partnerships with their cooperative societies or associations.
Presumptive tax involves the use of indirect means to ascertain tax liability which differ from the standard taxation rules that are normally based on the taxpayer's accounting records.
The term "presumptive" is used to indicate that there is a legal presumption that the taxpayer's income is not less than the amount resulting from application of the indirect method. Notably, such presumption may or may not be refutable.
Presumptive tax has been used in different countries around the world due to simplification of the tax compliance process. This is more so considering that a segment of the players in the informal sector have limited or no education.
The magnitude of their operations may also be minimal and thus the need to reduce the cost of compliance with tax laws.
Another key objective is combating tax avoidance or evasion in the informal sector. Presumptive tax eliminates the need for taxpayers to maintain accounting records for purposes of assessing tax on their income.
Equity and fairness are key principles of taxation that should be maintained in a presumptive tax regime. The selection of objective tax bases is thus critical in ensuring successful implementation.
The tax base could include, turnover, value of assets, industry-specific metrics for small businesses among others. It also ensures certainty since taxpayers know beforehand the tax base that will be used to compute their tax liability.
Prior to 2001, agricultural produce was subject to presumptive tax which was basically withholding tax at two percent on the gross amount of payment or the gross value of export.
Corporate bodies that carried out farming were, however, required to submit farming accounts. This was, however, suspended by the Finance Act, 2001.
The medium-term revenue strategy proposes the introduction of a final withholding agricultural produce tax at a rate not more than five percent of the value of the produce delivered to cooperatives or other organised groups.
By and large it is important that the imposition of presumptive tax on various categories of persons in the informal and hard-to-tax sectors is informed by data and not general assumptions.
This will ensure that the government does not tax poverty which would exacerbate the economic challenges facing the vulnerable in the society.
Many developing countries are facing challenges in the taxation of the informal sector and the determination of an appropriate approach.
Nigeria is undergoing through a comprehensive review of its tax system among other aspects and the Presidential Fiscal Policy and Tax Reforms Committee (PFPTRC) has indicated its intention based on data to propose an exemption of 95 percent of the informal sector from all taxes.
The chairperson of the committee indicated that the move was aimed at reducing the burden of multiple taxation on small businesses and low-income individuals.
Robert Maina is an Associate Director at Ernst & Young LLP (EY). The views expressed herein are not necessarily those of EY.
