Government operatives will face an uphill task to nab the ‘hard-to-tax’ informal sector and shore up taxes to finance its Sh3.58 trillion budget as devolved units continue to play hardball despite struggling with revenue mobilisation.

President William Ruto’s administration has pledged massive support to businesses in the informal sector, but it might reap little in terms of their tax contribution to the national revenue.

In the draft Finance Bill 2023, among others, Treasury wanted to expand the tax base through the narrowing of the Turnover Tax (ToT) threshold and rolling out of a compulsory electronic Tax Invoice Management System (eTIMS).

Experts, however, warn that since the Kenya Revenue Authority (KRA) lacks access to the business license issuance system held by the devolved units, the tax authority is toothless in tracking compliance to the ToT regime, which targets small businesses.

KRA as single tax agent

“No one is keen to just have a concerted effort for KRA to sort of act as the single tax agent for the county revenues. The government should instead consider efforts to bring more taxpayers into the ToT bracket, as a simplified form of taxation,” says James Mulili, tax policy director at PKF Consulting.

The Finance Bill 2023 has proposed to hike the ToT rate from 1 per cent to 3 per cent and narrow the threshold from the current Sh1 million – Sh50 million band to Sh0.5 – Sh15 million per annum, thus capturing more enterprises. ToT is payable regardless of whether a business makes a profit or loss.

There is already an existing fight between counties and the national treasury over the allocation of revenues, and making KRA as the overall collection agent is likely to create more resentment among counties despite struggling to mobilise their own revenues.

KRA does not give a breakdown of ToT annual performance, but the tax head has a big potential considering that small businesses contribute about 28.5 to the country’s economy, according to official data by the Kenya National Bureau of Statistics (KNBS).

Unlicensed businesses

KNBS data further indicates that there are 1.56 million licensed Micro, Small and Medium-sized Enterprises (MSMEs) and 5.85 million unlicensed businesses cutting across both formal and informal sectors.

“This is in line with the government’s attempt to tax the informal sector. Increasing the Turnover Tax from 1 per cent to 3 per cent may discourage the informal sector from embracing the Turnover Tax as the increase in rates may be viewed as punitive,” says PwC in its analysis of the Bill.

The mandatory single business permit issued by the county government makes it easier to track operations, incomes, and tax remittances, especially for those selling vatable goods currently under scrutiny through KRA’s eTIMS.

The difficulties in capturing the informal sector is forcing the government to continue hitting formal employees and other compliant taxpayers with fresh rate hikes. The proposed 3 per cent House Levy and other statutory deductions are, for instance, only mandatory to payslip owners.

However, since most counties have not adopted automatic and cashless payment systems and streamlined taxation and fee structures, there are loopholes in revenue collection.

For the year ending June 2022, counties missed the target for own-source revenue (OSR) collections, netting Sh35.9 billion collectively against the Sh60.4 billion target for the fiscal year. Higher revenue collection by counties will cut reliance on the national exchequer.

Only Turkana, Migori, Lamu and Vihiga were able to collect more than 100 per cent of their annual OSR target in the fiscal year.