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. They have long been recognised as a priority sector in Kenya with more than 70 percent of the gross domestic product under SME control. They also play a critical role in achieving economic growth rate target, employment figures, mobilisation of domestic savings for investment, harnessing local raw materials and poverty reduction, among others.
Small businesses have the advantage of reaching the farthest corners of the country, unlike the larger establishments. For this reason, an ideal tax policy is needed to ensure voluntary compliance, economic growth, and proper use of resources.
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. SMEs are generally perceived to be the seedbed for indigenous entrepreneurship and generate all the many small investments, which would otherwise not have taken place.
Being profit-generating establishments, SMEs are also expected to pay their tax dues. The important question, however, is how much tax should they be levied? SMEs 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 who pay only do so because authorities coerce them.
For many years, Kenya has continuously broadened its tax base among SMEs and various laws are enacted to provide preferential tax treatment to them such as turnover tax and voluntary declaration.
High tax rates and complex filing procedures are the most crucial factors causing the non-compliance of SMEs. Others like multiple taxations and a lack of proper enlightenment affect tax compliance. 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 Treasury should consider increasing incentives such as exemptions and tax holidays to not only encourage voluntary compliance but also attract investors who are potentially viable taxpayers.
However, despite this progress, taxpayer education and the cost of tax compliance remain a significant challenge for SMEs, as they often simply do not have the necessary staff resources and skills to fully comply with all tax obligations.
The cost of tax compliance can add to the cost of doing business such as extra resources deployed to comply with tax rules and penalties imposed for non-compliance.
Therefore, thissituation needs to be corrected for the SMEs to play their role in financing the government expenditure.
