Principal Secretary of the State Department for Micro, Small and Medium Enterprises (MSMEs) Susan Mang'eni has suggested the possibility of the informal sector paying the proposed 1.5 per cent housing levy through the Hustler Fund.
She says the potential of the sector's contribution to the State's ambitious housing plan is massive.
"You know, just with the Hustler Fund, I don't even have to look at the 15 million potential employees in the informal sector. The Hustler Fund has seven to eight million regular customers. If each one of them were to contribute Sh1,000, how much money is that?" she posed. The PS was speaking at the recent launch of the first-ever strategic plan by the Kenya National Federation of Jua Kali Associations (KNFJA).
"The source of a wealthy Kenyan is in these hustlers," she said, alluding to the possibility of bringing the informal sector on board the unpopular levy that will see salaried workers part with 1.5 per cent of their gross pay if President William Ruto ascents to the Finance Bill, 2023 in its current form.
Treasury had initially proposed the levy at three per cent, which was to be matched by employers. The proposal was, however, amended to 1.5 per cent and exempted employers from paying the levy following public outcry. It is being fronted as a route to helping Kenyans acquire homes through the Affordable Housing Programme.
Taxing the informal sector has been a major headache for successive regimes, with employees in the formal sector having to shoulder the tax burden.
This explains the push by the Kenya Kwanza administration to impose the 1.5 per cent housing levy, with President William Ruto and his Cabinet insisting it is good not only for salaried employees but for the economy as a whole, saying it will help create more jobs for the unemployed and increase revenues for the cash-strapped government.
President Ruto has also insisted that it is also in line with the Kenya Kwanza manifesto.
"The priorities in this plan have been chosen based on the impact on five targets, namely, bringing down the cost of living, eradicating hunger, creating jobs, expanding the tax revenue base and improving our foreign exchange balance," reads the manifesto in part. While government officials like PS Mang'eni know where the real revenue potential sits, bringing the informal sector into the tax net has always been a tall order.
Kenya is said to have a tax gap of 40 per cent, according to a 2017 study titled Informal Sector and Taxation in Kenya: Causes and Effects published by the International Journal of Law, Humanities and Social Science.
The study authored by Ndaka Angela Katee, a tutorial fellow in the Department of Public Policy and Administration at Kenyatta University, notes that this gap is relatively big compared to tax gaps in developed countries like Singapore, New Zealand and Denmark at 10 per cent and the United States, Canada and Chile at 20 per cent.
The gap is either through tax avoidance or evasion. The study notes that netting the informal sector is difficult because most of the sector players use labour-intensive technology and are unregistered.
They produce and distribute goods and services in an unregulated competitive environment outside of the regulatory framework of either national or county governments.
"Typically, the activities of an informal sector are not regulated by laws such as environmental, labour and taxation. However, the activities are subjected to local authorities like chiefs and local government which regulate business orderliness as well as legality," the study says.
The downside is that most of these activities are not included in the Gross Domestic Product (GDP) because their production is not accounted for and they generally do not remit any taxes except for the business permit fee paid to the counties.
It is, however, estimated that 34.5 per cent of the country's GDP is controlled by this informal economy largely represented by MSMEs. The study cites the informal economy as a tax administration issue. It argues the government does not have concrete data like the amount a farmer makes or an MSME makes in a year.
Registration as a taxpayer in Kenya is voluntary for business owners.
"Most people choose not to register either because they are ignorant about it or they just do not want to pay taxes and don't want to be caught up with the law," notes the study in part. It adds that the SME sector is characterised by seasonal businesses yet when registering a business, one has to be specific on the goods and services provided.
"An example is a vendor who hawks fruits and ice cream during the summer but in winter he moves into clothes. Such a vendor has no specific area he is operating from nor does he have specific goods," the study adds.
Economic survey
Data from the Kenya National Bureau of Statistics (KNBS) Economic Survey 2023 shows that there are 15.9 million employees in the informal sector and 3.1 in the formal sector. "The informal sector created 702,900 new jobs, which constituted 86.1 per cent of all new jobs created outside of small-scale agriculture and pastoralists activities," the report says. This is compared to 113,700 jobs created in the formal sector.
While these challenges are not new, successive administrations seem to be dragging their feet to put in place policies and regulations that would expand the tax bracket.
For example, the issue of multiple licences for businesses across counties has been as old as devolution.
PS Mang'eni said the Kenya Kwanza administration is working to reduce taxation bureaucracies. It also seeks to have business licences in counties rationalised.
"It means all the challenges we are experiencing when moving goods from one county to another with multiple licenses will be addressed," she said.
Making a case for financial inclusion through Hustler Fund, Ms Mang'eni noted that in just six months, it has helped onboard eight million Kenyans who had been locked out of mainstream financial services due to being negatively listed by the Credit Reference Bureau. When asked why the government keeps on piling more pressure on the formally employed, Micro and Small Enterprises Authority (MSEA) Chairman James Mureu said it all depends, first, on how the funds realised from the levy will be used, which would encourage the self-employed to opt-in.
"I have a big problem with Kenya Revenue Authority(KRA). They should be broadening the net rather than deepening it. You see, they are deepening it as far as the employed people are concerned. They must go back to the drawing board and think of how they can broaden tax collection," he said.
Mr Mureu said the moment, KRA is underperforming.
"When you sell a chicken, they want their money. But many other people out here are not paying tax," he said.
KRA said as of March, it had kept pace with revenue collection compared to last year.
"As at the close of March 2023, revenue collection averaged 95.1 per cent on original target and 93.4 per cent on Supplementary target, representing a collection of sh1.554 billion and a year on year eight per cent growth," said the taxman.
President Ruto has issued a target of Sh2.6 billion to KRA for the financial year 2023/24.
This is a 17 per cent increase from what the taxman is expected to collect by the of the current financial year, which lapses this Friday.
gkajilwa@standardmedia.co.ke
