• ToT was re-introduced in January, bringing the informal sector into the tax bracket, a move that is expected to widen the tax bands and ensure equitable distribution of the tax burden.
• Turnover tax is currently working perfectly in countries such as Ghana, Tanzania, Zimbabwe, South Africa and Nigeria
Kenya made history on February 20 when it joined other African countries in successfully taxing the informal sector through the first collection of turnover tax (ToT).
ToT was re-introduced in January, bringing the informal sector into the tax bracket, a move that is expected to widen the tax bands and ensure equitable distribution of the tax burden.
It is payable by any resident person whose turnover from business does not exceed or is not expected to exceed Sh5 million during any year of income.
Turnover tax is currently working perfectly in countries such as Ghana, Tanzania, Zimbabwe, South Africa and Nigeria in mobilising tax resources to boost growth and prosperity.
The African Tax Administration Forum is also actively leading countries in discussions around the growing interest in taxation of the informal sector.
Currently, only eight per cent of the over 40 million Kenyans diligently remit taxes, the majority of this population being in the employment bracket.
A recent report by the United Nations’ Economic Commission for Africa states that Kenya has the highest informal sector employment at 77.9 per cent, among Rwanda, Uganda, Tanzania, Egypt, Liberia Mauritius, South Africa and Madagascar.
The huge number of informal sector workers receive a steady income from businesses but do not remit their taxes as required.
ToT is in line with the Finance Act, 2019, compelling businesses whose income does not exceed Sh5 million to pay three per cent on gross receipts, payable monthly.
For example, if an individual’s gross receipts for January accrues to Sh100,000, they are liable to pay ToT at three per cent, which is Sh3,000. This amount is payable on or before the 20th day of the following month (February, in this case).
On the other hand, an individual who pays single business permit of Sh1, 000, pays 15 per cent of this, which is Sh150. This is advance tax, which is available, to reduce the taxpayer’s liability for the month. To illustrate this, the ToT paid from Sh10, 000 turnover is Sh300, but because of the presumptive tax of Sh150, is applicable in this case, it is deducted from the Sh300, making the payable ToT amount to only Sh150.
In collection of this tax, KRA targets all businesses or persons applying for licences in the counties. In doing this, the tax base is being expanded to include the rest of the taxpayers who do not pay.
Given the dwindling tax revenues generated from the small formal sector, tax experts and economists worldwide have called on countries to consider taxing informal sector enterprises.
Kenya is, therefore, moving towards the right direction, despite the outcry from taxpayers.
It is important to note that taxation is the key source of revenue the government of Kenya uses to provide public services to its citizenry. It is equally important that Kenyans embrace this move to expand the tax base and ensure that all taxpayers pay their equitable share of taxes.
Authors (Barnett and Grown, 2004) in The Politics of Private Foreign Aid, insinuate that the majority of developing countries are dependent on foreign aid as an external source of revenue. Kenya is amongst the countries that are trying to get out of foreign aid dependency through a self-sustainable economy, where policies support revenue collection.
KRA is keen on the successful collection of this tax, hence the use of technology such as iTax, Mservice and the USSD, to ensure maximum collection of ToT. This, in essence, means every Kenyan who consumes a service from businesses in the ToT bracket will remit the required three per cent via their mobile phones to a KRA till number.
The mobile payment platform eases payments through banks appointed by the Commissioner of Domestic Taxes Department, which include the National Bank of Kenya, KCB and Co-op Bank.
Taxpayers have a choice to pay ToT by cash, cheques or electronic funds transfers. ToT taxpayers are advised to register as KRA online services users to enable them access the KRA online services portal www.kra.go.ke/portal.
The use of mobile telephony to tap into the informal sector is one sure way of maximising the collection of ToT.
The design and performance of Kenya’s tax system has implications for inequality and it is thus the role of the government to pursue a fair tax system for equitable distribution of income and welfare of the citizens.
Turnover tax is one way of ensuring a fair tax system that does not lock out the informal sector from contributing to building the economy.
Since the re-introduction of ToT, taxpayers have decried that it will cripple businesses. This is far-fetched since only three per cent of the gross turnover is paid to the government and the balance remains with the business owner.
The modalities of collection of ToT are well thought out. KRA, for instance, has a cordial working relationship with county governments, who remit a list of all names of persons and businesses that have applied for licences.
KRA targets all businesses or persons applying for licences in the counties. This will also help the government fulfil the Big Four agenda.
Taxpayers, therefore, need to have goodwill in adhering to the set guidelines in remission of ToT, given that the informal sector is a key economic hub in many parts of the world.
The writer is the Commissioner for Domestic Taxes Department at Kenya Revenue Authority