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NGUNJIRI: Why most SMEs are not tax registered or non-compliant

SMEs should have a lower tax percentage to allow funds for business development.

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by Amol Awuor

Siasa14 January 2024 - 02:50
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In Summary


  • High tax rates and complex filing procedures are the most crucial factors causing the non-compliance of SMEs.
  • Other factors like multiple taxations and lack of proper enlightenment affect tax compliance among the SMEs, affecting the status of the complaint.
Kikuyu MP Kimani Ichung'wah, Deputy President Rigathi Gachagua, President William Ruto and SMEs CS Simon Chelugui during the commissioning of a modernised New KCC factory in Nyahururu on January 10, 2024.

Tax is the main source of revenue for the government’s development projects and recurrent expenditure financing. However, tax compliance among SMEs is poor. SMEs have been recognised as a priority sector for growth and development in Kenya. With more than 70 percent of the country’s GDP under SME’s control, they play a critical role in achieving our country’s targeted rates for economic growth and employment figures.

SMEs play a big role in Kenya including mobilisation of domestic savings for investment, appreciable contribution to the GDP, increased harnessing of local raw materials, employment generation, and significant contribution of poverty reduction. They provide through sustainable livelihoods and enhancement in personnel income, technological development and export diversification. Furthermore, they have the advantage of reaching the farthest corners of the country, unlike the larger establishments.

For this reason, an ideal tax policy needs to be adopted to ensure voluntary compliance, economic growth, and proper utilisation of resources rather than suffocating the entrepreneur initiative they aim to cater for.

Most large companies have their roots in small and medium enterprises, suggesting the future large corporations are the SMEs of today that must be nurtured to ensure their growth. Thus, SMEs are generally perceived to be the seedbed for indigenous entrepreneurship and generate all the many small investments, which would otherwise not have taken place.

Small and Medium Enterprises being profit-generating establishments are also expected to pay their tax dues. The important question, however, is how much tax should be levied? Small and medium enterprises are volatile establishments that need special treatment. Taking their nature into consideration, every little resource at their disposal can make a world of difference.

For this reason, several Kenyan SMEs choose to remain in the informal sector because they feel the cost of compliance is too high. And a considerable number of those who pay only do so because they are coerced by the authorities.

For many years, Kenya has continuously broadened her tax base amongst small and medium businesses and various legislative measures are enacted to provide preferential tax treatment to them such as turnover tax and voluntary tax declaration.

High tax rates and complex filing procedures are the most crucial factors causing the non-compliance of SMEs. Other factors like multiple taxations and lack of proper enlightenment affect tax compliance among the SMEs, affecting the status of the complaint. Therefore, the SMEs should be levied a lower percentage of taxes to allow enough funds for business development and better chances of survival in a competitive market. The government should also consider voluntary compliance but also attract investors who are potentially viable taxpayers in the future.

However, despite this progress, taxpayer education and the cost of tax compliance remain a significant challenge for SMEs, as they often simply do not have the necessary staff resources and skills to timely and fully comply with all their tax obligations. The cost of tax compliance can add significantly to the cost of doing business for SMEs, e.g. additional resources that have to be employed to comply with tax rules and significant penalties imposed for non-compliance with tax rules.

Thus, Kenya needs to further the development of its private sector by creating an environment favourable to the growth of SMEs, strengthening the factors that lead to business success, and addressing the problems threatening the existence and advancement of small and medium enterprises, so they can adequately play the role expected of them in economic transformation.

Since the individual SME pays a very small amount of tax compared to what the larger establishment would pay, tax authorities tend to give the larger corporations more attention. This means a good number of SMEs get away with not paying their taxes, hence, revenue that would otherwise have been invested in development projects that will end up benefiting even the SMEs is lost. This, therefore, is a situation that needs to be corrected, and SMEs will play their role in financing the government expenditure as it is the largest player in the economy.

 

Managing partner, WaterMark Consultants. [email protected]

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