State renews efforts to net hard-to-tax entrepreneurs

INFORMAL SECTOR: Government talks tough as it goes after small businesses and landlords in a bid to meet its revenue targets

BY JAMES ANYANZWA

The government has renewed its efforts to hunt down tax evaders that have left it struggling to meet revenue targets. At the top of the list of those it has trained its sights on are landlords and small business owners.

National Treasury Cabinet Secretary Henry Rotich said some landlords, particularly those in the city centre and upmarket areas, have started paying taxes on their rental incomes.

“We can’t quantify at the moment how much revenue can be generated from this new category of taxpayers because we are yet to complete mapping all the landlords,” he told Business Beat.

Rotich said his ministry shall by next year be able to work out what to expect from rental income.

But even as efforts are intensified to bring landlords and small and medium enterprises (SMEs) into the tax bracket, some experts say the challenge will be tracking down landlords in low-income areas and owners of unregistered informal businesses.

“Seventy per cent of the economy is run by the informal sector. Unless the government has a way of knowing and registering the businesses in the sector, its revenue targets will not be met,” said Scholastica Odhiambo, a lecturer at Maseno University’s department of economics.

‘Underground economy’

In a bid to mobilise revenue from the so-called “underground economy”, the government introduced the presumptive tax regime named Turnover Tax (TOT) in the Finance Bill of 2007.

The TOT is aimed at bringing businesses in the informal sector into the tax bracket.

Small business taxpayers pay a turnover levy at a rate of three per cent. These include small-scale manufacturing firms and jua kali businesses, agricultural enterprises and transport industries.

Businesses that make losses are exempt from TOT.

According to the Institute of Economic Affairs (IEA) Budget Focus last year, most micro and small businesses evade paying taxes by taking advantage of existing loopholes.

In addition, the huge administrative costs and human resource constraints make it difficult for the Kenya Revenue Authority  to follow up on each  eligible taxpayer operating in the underground economy.

“Generally, if the informal sector remains untaxed and more people transit into it, the government is likely to continue losing billions of shillings. Such a scenario will impact on the government’s ability to achieve its revenue targets and consequently its development agenda,” notes the report.

Over 60 per cent of those working in the informal sector are aged between 18 and 35 years, with 50 per cent being women, according to the IEA.

However, the SME sector’s contribution to the country’s annual income stands at just over 25 per cent.

According to the taxman, those who fail to comply with their tax obligations will be arrested and have their property seized.

Offenders

KRA staff found colluding with tax offenders also risk going to jail in addition to losing their jobs.

“We are concerned about taxpayers who do not remit their fair share of taxes and yet they want to enjoy services similar to those who are paying.

“We will spare no efforts in ensuring attachment of their properties and having them charged in a court of law,” said KRA chairman Marsden Madoka.

The 2013/2014 Budget of Sh1.64 trillion is expected to finance expanded government operations under the devolved system of governance, and at the same time spur economic growth, which has been weighed down by both domestic and external shocks.

Kenya is currently hard pressed for funds to support key programmes pledged under the government’s Jubilee manifesto. The country faces a Budget shortfall of over Sh300 billion.

However, KRA surpassed its first quarter collection target for the current financial year by Sh3.6 billion, fuelled by reforms in the Value Added Tax law.

The taxman collected a total of Sh228.4 billion from July to September.

While many are agreed that taxing the informal sector would add billions to public coffers, the sector is hard to keep up with, given the informal approach taken in establishment and dissolution of businesses.

Further, its cash-based nature makes it difficult for owners to keep adequate accounting records and audit trails.

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