AGRESSIVE TAXATION

Ensuring inclusivity of the informal sector in Kenya’s tax regime

Numerous taxation campaigns have been spearheaded by the revenue authority with a view to educating the general public

In Summary

•It is unfortunate, however, that while aggressive taxation may increase revenue collections in the short term, it is unlikely to be beneficial in the short and medium-term

The KRA headquarters at the Times Towers.
The KRA headquarters at the Times Towers.
Image: FILE

An enduring challenge experienced by the taxman is persistent below target revenue collections. This has seen the Kenya Revenue Authority increasingly come under fire from the National Treasury, with the pressure to collect often times forcing the taxman to take unreasonably aggressive measures.

Unfortunately, while aggressive taxation may increase revenue collections in the short term, it is unlikely to be beneficial in the short and medium-term. Rather than alienate taxpayers through aggressive taxation measures, the taxman should consider avenues for widening the tax net, and therefore share the burden equitably amongst taxpayers.

It is unfortunate that as it currently stands, Kenya's taxation burden is disproportionately borne by a minority. Consequently, in an effort to boost tax revenue collections and meet revenue targets KRA is forced to adopt increasingly aggressive taxation positions and policies.

The challenge should instead pose an opportunity for the revenue authority to introduce innovative taxation measures that equitably and proportionately bring underrepresented sectors within the tax net – for instance, the informal sector.

The informal sector, is defined as comprising economic activities that are not regulated by laws relating to taxation, labour, and the environment.

In Kenya, statistics show that the informal sector captures 83.4 per cent of total employment and contributes upwards of 30 per cent (approx.) to the country’s Gross Domestic Product (GDP). From the above, it is evident that the informal sector employs an overwhelming portion of the Kenyan citizenry and contributes a substantial portion of GDP. However, despite its significant role, taxation of the informal sector has largely remained elusive.

 

Two notable options for taxing the informal sector have been advanced by academic circles: Through registration and formalisation or through indirect taxation.

Under the former, businesses operating in the informal sector would be incentivised to formalise and thereafter taxed through traditional means. Alternatively, taxation of the informal economy through indirect taxation proposes the levying of tax on goods or services in the informal sector, for instance, value-added tax and withholding income tax, as the manner through which the informal sector may be taxed.

In consideration of the above, it is noted that numerous taxation campaigns have been spearheaded by the revenue authority with a view to educating the general public on the benefits of taxation to the economy at large. This has largely been viewed as an effort to highlight the necessity of formalisation and compliance with tax legislation. However, whether these information campaigns result in tangible increases in taxation revenues, through the formalisation and compliance of informal businesses, is yet to be seen.

Karen Kandie – MD IDB Capital