It is clear, from statements by various political actors, that Kenya aspires to be an internationally competitive economy, comparable to Singapore. But the tax and regulatory policies imposed by the Kenya Revenue Authority (KRA) and Kenya Bureau of Standards (Kebs) cannot be the key enablers in transforming Kenya.
KRA’s directive that receipts not issued on the eTIMS platform will be disallowed for tax purposes, and that certain expenses will not be recognised is a death warrant for thousands of small-scale traders, contractors and unincorporated businesses without capacity or scale to embrace such new digital change.
Most small contractors and sub-contractors in the building industry and informal sector businesses operate in a cash-based, subsistence economy, locations are temporary and the networks and technology required to support the compliance demanded by the taxman cannot be found. Disallowing their receipts and expenses because of their failure to adapt to the system ensures their extinction.
The increased number of goods and services subject to standards levies by Kebs, including road contractors, garages, dry cleaning and construction of dams, and others have all been categorised as manufacturing related activities for the purpose of levying.
A standards levy that is to be paid by manufacturers, which these small-scale businesses are not, adds to costs that they can ill afford. This could, in the long run, push many of them back to the parallel economy.
Construction employs directly and indirectly over two million Kenyans. When levies are added, the costs get passed on. Contractors pass the cost on to the client, the client then either delays or abandons projects and workers are thrown out of jobs. When small traders can no longer afford the tax, they close shop.
The more we force these businesses out, the less tax is collected by the government and the more we frustrate compliance by workers and traders.
The government should think carefully before forcing good businesses out of the formal economy with burdensome compliance costs. The less the government listens to the business community, the less inclusive growth we will see, the less the economy will grow and the less it will be able to collect tax.
Singapore and other successful economies did not get there by punishing enterprises. Singapore developed the foundation of its business economy on stability, predictability and ease of doing business. Regulation is firm but kept in check and taxation is reasonably broad-based and not suffocating.
Small and medium sized enterprises should be nurtured into compliant taxpayers, not sent to extinction through policy blight. The government seems to be doing the opposite.
Shrinking an already small tax base by aggressively closing the tax net will have the effect of shrinking tax revenue—businesses that go under will not pay tax, neither will those pushed underground.
There are better ways for the government to handle matters.
Tax digitalisation must be progressive and supportive. The eTIMS order must be introduced in a transitional manner and alternative means for small traders to provide proof of transactions be provided.
There should also be some means to provide technical and business capacity, and strong incentives for voluntary compliance rather than a blanket disallowance approach.
Kebs needs to urgently undertake a review of what it means to be a manufacturer and review the classification of so many SMEs for the purpose of levy payment. Standards regulation should be targeted at sectors and businesses based on their risk of non-compliance, not a blanket categorisation.
Kenya needs government agencies to move towards a harmonised approach to regulation and policy. The cumulative effect of KRA’s requirements, county rates, excise, Kebs standards levy, and all the other charges and levies that are being introduced is to make the cost of doing business unbearable. The government must move towards a more coordinated approach to supporting and regulating business in Kenya.
The State must also urgently institute structured consultation with industry stakeholders and especially SMEs. Policies made without the input of the people impacted are clearly destined for failure.
Kenya can, should and must be an Asian tiger economy, but before it can get there, it must embrace the pragmatism that has marked the development of the economies it seeks to emulate.
The government must urgently rethink its directives, not as a retreat from its stated policy objective, but as a strategic course correction that it must take for the sake of its citizens, and the jobs and enterprises we dearly need.
The writer holds an MBA in Project Management from the University of Wales. [email protected]
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