Business Daily
Date: 16.06.2016
Page 12
Article size: 287 cm2
ColumnCM: 63.77
AVE: 121177.77
Taxing informal sector requires better strategy
(use of indirect means to ascertain tax liabil­
ity, which differs from the usual rules based
on the taxpayer's accounts and records) is
highly subjective and will hurt not just the
ods, KRA is likely to use bank deposits, net
worth and sources and application of funds
that are all pretty much debatable. Use of
bank deposits to assess tax could discour­
age banking and hurt money supply. The
net worth method would require expert
knowledge to assess asset values and it
may prove expensive.
Perhaps sources and application offunds
may be accurate, but the method requires
strict record keeping which is the greatest
weakness of small and micro entrepreneurs
(SMEs).
Research on the informal economy, for
example,includingamajorworkby Peruvian
economist, Hernando de Soto's El otro send­
ero (1986), that was published in English in
1989 as "The Other Path" argues that exces­
sive regulation in the Peruvian (and other
Latin American) economies forced a large
part oftheeconomyinto informality and thus
prevented economic development
The Kenyan government should not rush
into additional regulatory mechanisms un­
til reforms on doingbusiness in the country
are complete. Perhaps the Treasury is not
aware that many of the SMEs within Nai­
robi's Central Business District spend the
better of the day playing hide and seek with
county enforcement officials.
Others suffer from political disruptions.
They lack sanitary facilities in the many plac­
es they operate from and are largely stigma­
tised as problematic and uncontrollable.
Whereas the informal sector may gen­
erally not be monitored for inclusion in the
computation of the GDP, the sector has in­
creasingly come under regulation and now
greatly contributes indirect tax revenue to
informal sector but KRA too.
the State.
BITANGE NDEMO
TAXATION
It is estimated that the informal sector
in Kenya contributes in excess of 35 per
cent to the GDP and employs close to 80
per cent of the workforce.
Many studies define the sector as com­
prising economic activities that are not
regulated by laws relating to taxation, la­
bour and environment. It is a significantly
important sector. However, such definitions
are misleading and may have driven treasury
secretary Henry Rotich to propose presump­
tive taxation measures for the sector in the
2016/17 Budget estimates.
The debate to tax the sector has been in
the cards. At a recent pre­budget workshop,
an officialfromthe KenyaRevenue Author­
ity (KRA) presented a paper titled "Informal
Sector and Taxation in Kenya: Issues and
Policy Options", which estimated that tax
losses from the sector amount to between
Sh60 billion ­ Sh80 billion ayear.
KRA failed to acknowledge the fact that
the informal sector pays taxes indirectly both
to the national as well as the local govern­
ments. The blanket condemnation of the
sector is therefore unjustified. The intro­
duction of a presumptive taxation method
This is because the method is not the best
The sector's role is larger than what the
in fosteringtax compliance and the admin­
istrative cost may be too much to bear. By
introducing indirect tax assessment meth­
policymakers think At the minimum, the
sect or keeps the country stable by providing
employment where industry has failed.
The backwards andforwardlinkages be­
tween the informal and formal sectors sup­
port many formal industries through ubiqui­
tous distribution mechanisms without which
some formal enterprises could collapse. The
majority of SMEs, especially at micro level,
are women who are likely to be vulnerable
to harassment by tax assessors.
There are creative ways to build a tax com­
pliance culture. Mauritius and China devel­
oped an incentive that linked tax payments
to lotteries. ArecentstudybyDeloitterecom­
mended that the Nigerian government use a
similar scheme such that tax receipts, such
as PAYE, value added tax and withholding
tax receipts, could be used aslottery tickets,
and taxpayers would have the opportunity
to win simply by filing their tax returns and
paying the tax due.
The more effective method is to start
with a low tax rate for the informal sector
and progressively harmonise it with the
general taxation method. Thismethodwas
effectively used by the Irish government,
which introduced a low 12.5 per cent uni­
form income tax rate and later simplified
procedures and regulations.
They succeeded in developing a tax com­
pliance culture. A more creative method is
to encourage use of electronic transaction
by slowly moving the economy out of cash
transactions while building abig data ana­
lytic capability
In the long ran it would be easy to esti­
mate taxliabilitywithoutaprotracted fight
with a key sector. In effect, Kenya needs a
long­term incentive strategy to bring the
informal sector into the tax bracket.
It must not just be promoting a culture
of tax compliance, but a genuine progres­
sive strategy that encourages enterprise
scalability.
The writer is an associate professor at
University of Nairobi's School of Business
Ipsos Kenya ­ Acorn House,97 James Gichuru Road ­ Lavington ­ Nairobi ­ Kenya