OPINION: Presumptive tax will unlock more revenue from informal sector

By Dr. Ruth Wachira

Starting January 1, 2019, there will be significant change in the taxation of the small enterprises and the informal sector following proposals contained in the Finance Bill 2018/2019.

In his Budget Speech, Cabinet Secretary for National Treasury sought to replace the current Turnover Tax (TOT) with a presumptive tax on the small enterprises.

TOT was introduced in 2008 as a simplified taxation method targeting the informal sector. The simplified tax processes under TOT were aimed at facilitating the informal sector to account and pay tax. It sidestepped complex accounting practices.

Business enterprises with an annual turnover of less than Ksh.5 million are required to account for TOT at a rate of three per cent of the gross turnover for each quarter of the year.

Unlike in the developed countries where the formal sector contributes a bigger share of the Gross Domestic Product (GDP) as well as creation of employment opportunities, the case is quite the opposite in the developing world.

A number of studies conducted over the years indicate that the informal sector has been growing rapidly in many developing countries, including Kenya, hence commanding a substantial share in the GDP.

Consequently, the sector has continued to create more employment opportunities than the formal sector. The latter has been a subject of discussion majorly due to the high rate of entrenchments occasioned by factors such as use of modern technology which has continuously cut down the need for human resources.

A report by the United Nations Economic Commission for Africa in 2015 showed rapid growth in creation of more employment opportunities in the informal sector than in the formal sector.

The report further indicated that Kenya had the highest number of employment opportunities in the informal sector compared to eight other African countries featured in the report. The countries included Rwanda, Tanzania, Uganda, Liberia, Egypt, Mauritius, Madagascar and South Africa.

According to Budget Focus, a Publication of the IEA Budget Information Programme released in 2012, the informal sectors in the developing countries accounted for 35-50 per cent GDP. In relation to Kenya, the report further indicates, the informal sector accounted for 77 per cent of employment opportunities.

Despite this exponential growth, revenue collection from the informal sector has been on a decline in many countries. Experts have attributed this to lack of formal and well defined structures within the sector.

In Kenya, for instance, turnover tax was introduced in 2008 to bring the players in this sector within the tax bracket but the revenue collected has not been a reflection of this rapid growth.

The introduction of the presumptive tax is therefore intended to bring more of informal sector into the tax bracket. It will be pegged on business permits and trading fees at a rate of 15 per cent of the business permit or trading fee.

This means that a trader whose business permit fee is, for example, Ksh.10,000, will pay a presumptive tax of Ksh.1500 only.

Apart from bringing more industry players on board, the presumptive tax is a more effective and efficient way of collection of tax from this category of taxpayers since it will involve collection from a centralised point at the time of issuance of county trading licences or permits.

Further, unlike TOT which was accounted for after every four months, presumptive tax is a once-a-year affair which saves the traders the hustle of doing tax returns every four months. This means that taxpayers will have more time to concentrate on their businesses.

With close collaboration among the Kenya Revenue Authority (KRA), the National Treasury and County Governments, implementation of the presumptive tax will not only be successful but will also propel the country’s development agenda to greater heights through generation of more revenue.

As the country focuses on implementation of the Big Four Agenda spearheaded by President Uhuru Kenyatta, the expected revenue proceeds from the presumptive tax will significantly contribute to financing the Government projects under the Big Four Agenda.

The operationalisation of this tax will enhance the cooperation between KRA and county governments, with the latter expected to learn from best revenue collection measures developed over a long period of reforms.

Introduction of this tax is also a big win for the county governments as they will now be in a closer working relation with KRA, a seasoned revenue collector. The underlying advantage in this working relationship is a potential boost in revenue collection for county governments from lessons to be learnt.

In order to ensure smooth implementation, the authority has already commenced consultation with the relevant stakeholders including the Council of Governors, respective County Governments and relevant representative organisations.

The writer is the acting Commissioner for Domestic Taxes at the Kenya Revenue Authority (KRA).