Kenya needs to tap into the informal sector to boost tax collection.
Speaking at a taxation and bottom-up economic model panel discussion, economist and MSMEs consultant Tony Murega said Kenya should take steps to bring the informal economy into the tax fold.
He said that this will make policy transmission easier and data made available.
“We currently need data-driven policies which means one cannot plan or make policies on a sector of an economy where you have little data or information about,” Murega said.
He added that the tax base system at the moment is very narrow and it needs to be broadened.
“The Pay As You Earn (PAYE) tax is a burden to roughly three million Kenyans in the formal economy because the informal sector lacks income taxes and payroll taxes,” Murega said.
He said it is however impossible to tax the informal sector as KRA lacks the capacity to go after everyone to assess the amount of taxes that are due and follow up on payment.
Corporate Governance Frontiers CEO Vincent Ongore said that the cash economy possess a big problem because many people are involved in activities that cannot be traced by the tax administration.
Ongore explained that if a trader brings in cattle from Moyale and delivers them to the slaughterhouses in Dagoretti, he is paid in cash.
“There is no way the government is going to know the amount of money that was transacted. If all transactions were made on a digital platform, then they can easily be traced,” he added.
He supported government plans to move Kenyans to digital platforms which will eventually help deal with the question of traceability of economic transactions.
“In a country that is largely cash-based, traceability of taxable activities is difficult. This will improve tax administration efficiencies that will give us more revenues,” Ongore said.
Ongore also said that the law on digital services tax should be given traction.
It came into effect after the amendment of the Finance Act of 2022 - The value-added tax (Digital Marketplace Supply) amendments were signed into law in 2021.
The bill revised several tax laws to amend section 10 of the VAT Act of 2013 regarding the measures of electronic services, the internet, and digital marketplace supply (DMS).
Despite having the best technology in tax administration in Africa ahead of South Africa, Ongore said that the move to increase taxes is extremely unnecessary if the government fails to mobilise what is already there.
Having worked for three decades at KRA, he blamed the taxman for the inefficiencies in the tax administration systems.
“KRA has a lot of technology that it is not deploying and therefore other authorities that have less technology but are deploying them efficiently are generating more tax revenues,” Ongore said.
Institute of Economic Affairs (IEA) CEO Kwame Owino said that there is no formal economic model referred to as bottom-up.
He added that it is a political philosophy that directs the government’s interventions and priorities to people who are at the bottom of the pyramid.
Kwame also said that there is no reason in the bottom-up argument for raising taxes as this translates to paying the government more and eating less.
“The consequences of a tax raise include people trying to invade paying taxes which is illegal,” Kwame said.
We are looking to raise the tax base yet we are not addressing the issue of money that lies down there which can be collected using appropriate physical policy designs and administration structures that address these issues.
KCA School of Technical College director Faustin Mwinzi said that income declaration by those in the informal sector remains tricky.
He further said that the informal sector misses out on a lot and needs to be educated so as to understand the benefits that come with being a formal business.
These include access to bank loans and being able to do business with the government.
