One of the principles of effective tax administration is simplicity. Tax processes that are simple are a sure bet on enhanced revenue collection and tax compliance. However, as experts argue, the definition of simplicity should take into account the nature of a given sector. In Kenya, for instance, we have two major sectoral segmentations: the formal and the informal.
The latter sector, despite its vibrancy and substantial contribution to the gross domestic product (GDP), has had very little to write home about in terms of revenue to the government. The current tax burden is largely shouldered by the formal sector which employs only two to three million out of 16 million working Kenyans. This translates to less than 20 percent of the population that earn an income remitting their fair share of taxes.
Taxing the informal sector has been the bane of many tax administrations across the world. Economy and taxation think tanks have largely attributed the ineffectiveness to fully tap the revenue potential from the informal sector to lack of a suitable tax regime.
The general taxation framework in place is perceived to mainly target the formal sector.
In a study titled Taxing the Informal Sector published in 2014, Anuradha Joshi et al attribute the challenge that has been taxation of the informal sector to two key factors.
The first is high compliance costs compounded by complex tax administration processes that do not necessarily suit the sector. The second factor is high cost of collection. The investment focus ends up bringing back very little revenue, which does not make much economic sense.
Joshi et al (2014) opine that introduction of presumptive taxes is the best bet to fully tap revenue from the vibrant sector. The beauty of presumptive taxes, the study further states, is that they enable tax administrators to simplify any complexities that may hinder effective revenue collection from the informal sector. Simplification of presumptive taxes is brought about by the use of simplified indicators such as simple bookkeeping and simple tax estimation by the taxman.
In 2007, the Kenya Revenue Authority (KRA) took a stab at taxing the informal sector by introducing Turnover Tax (ToT). The ToT charge was three per cent of the gross sales, targeted at small and medium enterprises whose annual turnover was more than Sh500,000 but less than Sh5 million.
Taxpayers were required to account for ToT quarterly by filing and meeting their tax liabilities.
Due to various administrative challenges, all which led to below-expectation collection, the government scrapped ToT on January 1, 2019 and replaced it with presumptive tax.
Presumptive tax, which is still in force, is charged at 15 percent of the single business permit or trade licence fees.
While the idea behind ToT was to simplify tax compliance for the informal sector, close to 10 years later, this seems not to have been achieved.
The old ToT regime proved to be complex for the sector. A simpler version is now in place having been reintroduced vide the Finance Act, 2019.
There are various aspects about the reintroduced ToT that make it easier and more suitable to administer than the former.
First, though still charged at the same rate of three per cent, the new ToT is accounted for monthly and is a final tax.
Taxpayers are not required to account for it later in the year. Secondly, taxpayers are only required to maintain simple records for accountability.
The only records to be maintained are daily sales records. The compliance load is so light one does not require to enlist the services of an accountant. The system has been configured in a way that it automatically calculates the tax due based on the gross sales. This significantly reduces the cost of compliance, which has been hurting collection from the informal sector.
To further simplify the process, the KRA has embedded an online ToT calculator, which eases the burden of calculating the tax due.
The taxman has also announced plans to launch a mobile phone application and a USSD code to enable all ToT taxpayers remit their taxes more conveniently.
This will save taxpayers time so that they do not have to leave their premises to remit their taxes.
It is noteworthy that persons registered for VAT, employment income, and rental income are exempt from turnover tax.
Moreover, limited liability companies, and management and professional services are also exempt.
Success of the aforementioned steps taken geared towards a simplified revenue collection mechanism in the informal sector will be a landmark milestone in tax administration.
It is expected to bring into the tax bracket approximately 10 million people operating in the informal sector and hopefully reduce the pressure on the traditional taxpayers in the formal sector.
There is, therefore, a dire need for key players in the informal sector to back up the government on this plan to ensure that everybody contributes their fair share of revenue for the country’s development.
The writer is a policy analyst.