TAXING THE POOR

Turnover Tax: Days of extortion, days of revolt

Is it moral that a tax regime erodes the business capital of the poor?

In Summary
  • Eviscerating small businesses may arouse two major reactions from the poor:
  • Either they will disappear into thin air, if they scent extortion, or they’ll revolt, if they interpret this tax as oppression
Woe to those who make unjust laws, to those who issue oppressive decrees, to deprive the poor of their right and withhold justice…
Isaiah 10:1 NIV

Our government is choosing to extort the poorest businesses and trying to make a virtue of it.

The finance bill of 2019 imposed a three per cent Turnover Tax on business with below Sh5 million turnover per year. Elizabeth Meyo, the Commissioner of Domestic Taxes at the Kenya Revenue Authority, states that “…if one operates salon, butchery, or grocery store, you will be required to declare your sales online and pay the taxes on the 20th of each month.”

And for one to get a business licence from their county government, they will have to pay an extra 15 percent of the permit fees to KRA as presumptive tax. In complying to these new demands, Meyo further declaims, “the business owners will have fulfilled their patriotic duty for a better Kenya”.

 

Imposing the three per cent Turnover Tax (TOT) on informal micro and small businesses is monstrous, and a disdain to the weaker Kenyans. Though legal, TOT is immoral. I echo the prophetic declaration: “Woe to those who make unjust laws, to those who issue oppressive decrees, to deprive the poor of their right and withhold justice…” (Isaiah 10:1 NIV)

Various economic findings acknowledged the substantial contribution of the informal sector in most developing countries to their Gross Domestic Product. The informal sector is one of the biggest employers in Kenya, and accounts for over 80 per cent of employment opportunities. According to Zachary Mwangi , the monthly expenditure on salaries and wages for unlicensed Micro, Small and Medium Enterprises (MSEMs) was Sh9 billion, which translates to 25 per cent of total outlays a piece.

The ethical reasoning of those calling for the micro and small-scale businesses to pay taxes as demanded is implausible, because it does not raise the second-order question. Is it moral to make these demands on the poorest of Kenyan businesses?

Is it moral to treat the poor with partiality, when the new tax regime would disenfranchise them?

A turnover tax is like a sales tax or a value-added tax (VAT), with the difference that it taxes intermediate and capital goods, as Kimaru and Jagongo argue. It is on an ad valorem basis (based on the value of the good in question, rather than being flat taxes), applicable to a production process or stage. TOT makes the poor to pay another indirect tax, while those above the cut off of Sh5 million would pay direct tax, a better tax plan for their businesses.

Let us consider a hypothetical case of a business run by Achieng’, “Nyamulu Beauty  Salon”, in Kariobangi to illustrate this point. With her revenue turnover of Ksh. 100,000 for January 2020, she would enlist for TOT.  

An alternative tax plan to TOT would give a different result. If we the above scenario described her business, then under scenario one where she paid TOT, her profit would be Kshs. 12,900. Under scenario two where she pays personal income tax, her profit would be Kshs. 15,538. And if she were registered for VAT and pays also PIT, she would have made profit of Kshs. 20,182.

 

The individual tax plan would, therefore, be more favourable to the poor income business groups than the TOT. Notice also that her business has contributed indirectly to the government revenue by more than Ksh. 8, 042. Then if subjected to the TOT of Ksh. 3000, she would have contributed Kshs. 11,042 to the government coffers.

Not giving helpful advice to the poorer business operators is like putting a stumbling block on a blind man’s path.

Is it moral that a tax regime erodes the business capital of the poor?

In 2016, Mwangi (KNBS 2016) notes, small and medium establishments spent significantly high part of their net income on investment at 63.4 and 69.7, per cent respectively. So, they have a limited amount available to reinvest, either as reinvestment or investing in new businesses and investment in agriculture.

This erosion of capital from the small business will delay their escape from poverty.

The consequences of eviscerating small businesses would be catastrophic owing to the sector’s significance in the economy. It may arouse two major reactions from the poor. Either they may disappear in thin air, if they scent extortion, or they will revolt, if the poor interpret this tax as oppression.

The government and KRA as the implementing body can act morally and avoid hurting the small-scale businesses. Why not make it a priority policy to rationalise the informal sector rather than wipe it out through harsh tax policies?

Turnover tax as enacted is elective, for which qualifying small businesses can opt to register for the standard tax system. This move would allow them to be recognised as other businesses. For with sound records, they may take advantage of comprehensive inclusion rules and a reduction process that requires maintaining proof of expenditure.

The tinders are there waiting for something to ignite them. If the poor interpret these as days of extortion, we may as well have ushered in days of revolt.

A priest of All Saints Cathedral Diocese of the Anglican Church Of Kenya. He is also an adjunct lecturer at St Paul’s University, Limuru. The views are his own.