The government has remained fixated for years with the premise that there is a huge untapped tax base in the small and medium enterprise (SME) sector. This has given rise to all manner of initiatives to “bring SMEs into the tax bracket.”

All have invariably flopped. This is because these predications are based on a complete failure to grasp the dynamics of the sector, wishful thinking, or sheer obstinacy.

The picture presented by SMEs looks grand. There are 7.4 million SMEs in Kenya, employing 15 million people (83 per cent of the workforce), and contributing 40 per cent of economic output.

But what is the reality of SMEs? Most SMEs are low-tech, low capacity, low revenue businesses which are perpetually cash strapped. They provide their operators with a subsistence livelihood, a measly existence. They have zero capital base, and are permanently consigned to a rudimentary existence from which there is no escape.

Lack of capital means they are incapable of undertaking any serious business which will enable them to grow. They live at the bottom of the business food chain, so have zero power to negotiate good margins on contracts, or even enforce payments.

Consequently, they are permanently in a desperate mode – with perpetually strained and unreliable cashflows. No bank will touch them. Without marketing capacity, market penetration is nil!

Most SMEs have no capacity or training in the most rudimentary book-keeping.

Others are a one-man, one-woman shows perpetually on the run, staying just one step ahead of the hangman’s noose. Most are debt ridden and operators have exhausted all personal credit avenues and live on shylocks.

Most SMEs were started because operators could not get a job.

They started something with some funds borrowed from friends or relatives to make some money. They entered fields already congested. Most SMEs are not businesses in the conventional sense- they are jua kali! Expecting these jua kali to fit in the conventional business mould where they have to be tax compliant is just self-delusion.

So, the Kenya Revenue Authority (KRA) trying to enforce tax compliance in this desolate wasteland, because that is what it is, is like trying to squeeze water from a stone- literally! All that this has resulted in is a perpetual game of hide and seek, where KRA has hired an army to harass SMEs, and the two become entangled in a snake dance which simply ends up stressing out both.

The question at this point is not even on how to make SMEs pay taxes – they can’t – it is about rethinking the whole concept of SMEs in Kenya and what role they can, and should play, in the economy.

What is the way forward? Most SMEs are in the period between establishment and collapse.

Government data shows that 70 per cent of SMEs collapse within three years. So, of the 7.4 million SMEs in Kenya, really one is talking only of only two million – all the rest are in the process of collapsing. The jobs they provide are very poor quality jobs, and salary payments are as erratic as cashflows.

Worse, the government has made zero investment in this sector, yet wants taxes from it. The starting point for SMEs is – let them be! They are already playing a critical role as the country’s safety valve at zero cost to government.

Government must get a radical mindset when it comes to SMEs. KRA should concentrate on determining the level at which SMEs become tax capable and track that.

The thrust of SME policy must be to move them towards formalisation. Build markets and godowns countrywide as working spaces. Set up business incubators across the country. Let the experienced Kenya Industrial Estates (KIE) lead the charge countrywide.

Government must change course in managing SMEs. Most are merely survival kits for their operators who abandon them the minute “something better” comes up.

And that role is all that the government should expect them to play given that it is government’s economic management failure that has pushed hapless millions into jua kali!

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