Top gains of making SMEs tax-compliant

Tax is the main source of revenue for government 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 country’s gross domestic product (GDP) under the control of small enterprises. They play a critical role in achieving economic growth and employment targets.

SMEs play a big role in Kenya, including mobilisation of domestic savings for investment, harnessing of local raw materials, employment generation, and significant contribution to poverty reduction through sustainable livelihoods and improving income, technological development and export diversification.

Furthermore, they have the advantage of reaching the farthest corners of the country unlike the larger establishments. For this reason, an ideal tax policy is required to ensure voluntary compliance, economic growth and proper use of resources rather than suffocating the entrepreneur.

Most large companies have their roots in SMEs, calling for careful nurturing to ensure their growth. Thus, SMEs are generally perceived to be the seedbed for indigenous entrepreneurship.

SMEs being profit-generating establishments are also expected to pay taxes due.

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.

TAX BASE

For this reason, a number of 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 who pay do so because they are coerced by the authorities.

For many years, Kenya has continuously broadened her tax base within the SMEs and various legislative measures are enacted to provide preferential tax treatment to them such as turnover tax and voluntary tax declaration.

High tax rates and complex filing procedures are the most crucial factors causing non-compliance among SMEs. Other factors like multiple taxation and lack of proper enlightenment affect tax compliance among them.

Therefore, the SMEs should be levied at lower rates 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 tax holidays as these will not only encourage voluntary compliance but also attract investors who are potential taxpayers in the future.

However, despite this progress, taxpayer education and the cost of tax compliance remain a significant challenge for SMEs, as often they simply do not have the necessary staff resources and skills to comply with the obligations. The cost of 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 penalties.

LARGE CORPORATIONS

Thus, Kenya needs to further the development of its 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 SMEs, so they can adequately play the role expected of them in economic transformation.

Since the individual SME pays a small amount of tax compared to what the larger establishment would pay, tax authorities tend give the larger corporations more attention.

This means a good number of SMEs get away with not paying taxes, hence a loss of revenues that would be invested in development projects that will end up benefiting the SMEs themselves.

This, therefore, is a situation that needs to be corrected. If executed well, SMEs will play their role in financing government expenditure as it is the largest player in the economy.

Ndirangu Ngunjiri, managing partner, WaterMark consultants; [email protected]