JUSTIFIED

Turnover tax best way to nurture the rich informal sector

Glory of the informal sector is not felt at the national revenue kitty

In Summary

• Turnover tax is the best bet our government is counting on to tap revenue from the rich informal sector. 

• There's a raging wave of opposition against the reintroduced tax on the account that it will cripple the informal sector.

The KRA headquarters at the Times Towers.
BROADER TAX BASE: The KRA headquarters at the Times Towers.
Image: FILE

The first day of the New Year saw the implementation of key provisions in the Finance Act, 2019.

Among them was the reintroduction of turnover tax (ToT), which has hitherto evoked mixed reactions. The lion’s share of these reactions is a raging wave of opposition against the reintroduced tax on the account that it will cripple the informal sector.

Despite the raging opposition, there is a need to have honest conversations about turnover tax before casting aspersions on the Kenya Revenue Authority and the government at large.

It is indisputable that the informal sector has been very vibrant in terms of both employment creation and contribution to the national gross domestic product. Various scholarly findings put informal sector’s contribution to the GDP at between 35-45 per cent. Again, compared to the formal sector, the informal sector is commanding a higher share of employment opportunities in the market.

Unfortunately, the glory of the informal sector is not felt at the national revenue kitty. And this is not a phenomenon unique to Kenya; governments in the developing world have been scratching their heads at the best way to tap revenue from the informal sector with little success. At the moment, turnover tax is the best bet our government is counting on to tap revenue from this rich reservoir.

Successful taxation of the informal sector comes with a multi-fold benefit. First and most important, it will be a major boost to the revenue kitty, which will, in turn, go a long way in bridging our perennial budget deficits. This could also be a sure way of emancipating our country from foreign debts, which are a threat to our sovereignty.

Second, when we successfully tap revenue from the informal sector, we will make significant strides towards closing the rift between the taxpaying population and the actual population.

Kenya is among the many countries in the world where this rift is extensively wide. As a matter of fact, the active taxpayers in the KRA records are a handful compared to the country’s total population. Leveraging on the rich potential of the informal sector is an opportunity for more Kenyans to contribute to the kitty.

It is, therefore, important we look at turnover tax as an avenue to improve our country in the long run. Furthermore, the more taxpayers we have in the bracket, the higher the chances of lower tax rates across the board in the future. 

 

Karatina