Tap on informal sector to raise collection of tax, experts advise

Deputy Vice Chancellor Academic and Student Affairs KCA University Prof Joshua Bagaka's address during discussion on Taxation and Bottom Up Economic model on Feb 23, 2023. [Jonah Onyango, Standard]

The government needs to widen the tax base to cut over-reliance on income collected through Pay As You Earn (PAYE).

A panel discussion on taxation and Bottom-Up economic model heard that the government should push for mainstreaming of informal sector to increase tax collection.

"The government should take steps to bring this economy into formal fold because there are many advantages, one being that policy transmission is easier and data is available," said Tony Murega, accountant and lecturer in economics and consultant on micro, small and medium enterprises (MSMES).

He said what the government needs now is data-driven evidence. "...because you cannot make policies or plan on a sector of economy where you have little data or no information about it.''

The panel discussion was organised by Kenya College of Accountancy University's Centre of Excellence in Tax Education.

Mr Kwame Owino, the chief executive officer of the Institute of Economic Affairs, and Prof Vincent Ongore, Associate Professor, Business Administration and Entrepreneurship, were in the panel, as well as Faustin Mwinzi, director, School of Professional Programmes at KCA.

KCA Deputy Vice Chancellor Prof Joshua Bagaka welcomed the panel discussion saying such events give students a chance to engage and have a conversation about current issues such as taxation.

Murega said one other advantage of bringing the informal economy into the mainstream fold was to broaden the tax base.

He said at the moment, the tax base was narrow with PAYE accounting for about three million people in formal sector.

"However, you cannot tax the informal sector because KRA has no capacity or machinery to go after every person to assess the tax that is due," Murega added.

He explained that an informal economy (or shadow economy) is the part of any economy that is neither taxed nor monitored by any form of government and accounts for 83.4 per cent of total employment.

Murega explained that there are only six million registered taxpayers, of whom three million are in formal employment while another three million worked in the informal sector. An estimated 15 million informal workers, however, are not covered.

Mwinzi said the informal sector was missing out and needed to be educated to enjoy the benefits that come with formal business, which includes bank loans and doing business with the government.

"Kenya's business model is individual-based and either run by family or one or two people, so if they come together and pool resources, they can create bigger enterprises that can create more jobs and pay taxes," he said.

Kwame Owino, however, said there was no formal economic model called bottom-up, but rather the government taking priorities and interventions to people who are at the bottom of the economic pyramid.

He said there was need to have a moderate tax rate spread over to as many people as possible, and taxes should not just be increased but ensure compliance.

''We also need to separate between income and consumption taxes, and the latter should be spread even more. For either, the government should have different approaches,'' he said.

Prof Ongore said the fact that our economy is cash-based has prevented KRA from proper tax collection, but digitisation might imporove matters.