As at 2015 the informal sector employed over 80% of the Kenyan working population as was reported in an article published by the Institute of Economic Affairs. The same is the case in most developing countries, where the informal sector accounts for up to half of most economic activity.
While the informal sector accounts for a significant proportion of the workforce in the East African region, its impact on GDP is largely outsized by the more formal sectors of the economy when the value of output is taken into consideration.The informal sector in Kenya only accounts for slightly above 30% of the GDP. Over 60% of those working in this sector are youth between 18–35 years, and half of them are women.
The resulting assumption, as is characteristic of the informal sector in an economy, is that a majority of the players do not register or comply with any regulations.They make sales and pay for inputs including labour in cash; they do not have bank accounts making it harder to track their revenues hence the reason why they get away with not paying income tax.Despite the tremendous potential, the sector has remained the taxman’s hardest nut to crack. Lack of formal structures and a tax framework that suits the sector have been major drawbacks in the taxman’s quest to tap revenue from this sector.
With the economic environment proving to get even tougher, a number of companies laid off their staff in the past two years. The reduction in employee headcount has pushed down pay-as-you-earn (PAYE) collections by the Kenya Revenue Authority(KRA), putting the Treasury’s finances in a precarious position in the first half of fiscal year 2019/20.As a result of the low collection, cumulative ordinary revenue underperformed the target by KSh138.7 billion (US$1.3 billion) in the half-year period to December.
With the assumption that the laid off staff are now turning to the informal sector for a source of income, the KRA is hot on their heels to ensure that even now without formal employment they can still be tapped into their new found sources of income for taxation.
The government has been keen to put in place a simpler taxation framework to enhance tax compliance in the informal sector. Last year, the government amplified its pursuit of revenues from the informal sector by introducing a simpler tax regime known as presumptive tax.
The implementation of presumptive tax phased out Turnover Tax (ToT) which was first introduced in the Kenyan taxation framework in 2007 with a view to tapping revenue from the slippery and volatile informal sector. ToT’s rate is 3% of the gross monthly turnover. The threshold to qualify for the payment of this tax is an annual turnover of more than US$5,000 but less than US$50,000.
After proving to be ineffective in terms of revenue collection the ToT was done away with in 2018 to make way for the introduction of presumptive tax.Presumptive tax came into effect on January 1, 2019 after its introduction through the Finance Act 2018. The primary aim was to replace the ToT which most traders did not comply with. However, the poor performance of the collection in the presumptive tax led to the re-introduction of ToT after less than one year of observation.
Presumptive tax is charged at a rate of 15% of the single business permit or trade license fee and payable upon application or renewal of the license. Unlike other taxes, presumptive tax is a final tax and does not require filing of a tax return thereby making it simpler to comply with. Similar to ToT, the threshold to qualify for presumptive tax is an annual turnover of KSh5 million (US$50,000) and below.
How these two taxes work is that the presumptive tax paid is allowed as a credit against any ToT payable by the taxpayer. For instance, if the license fee for your single business permit is KSh10,000 then your presumptive tax payable would be KSh1,500. In turn, in the month of January you make revenues of KSh200,000 then the ToT payable would be KSh6,000. After utilizing the credit on presumptive tax paid of KSh1,500, the taxpayer should remit further tax of KSh4,500 payable on or before 20th of February.
Initially, presumptive tax was introduced as a way to net those in the informal sector. The tax is required to be paid before application for the single user business permit. The reasoning being that small scale traders are usually more compliant with County Council regulations than they are with KRA regulations. The requirement to have the tax paid before acquiring one’s business permit would have ensured that all traders are first and foremost on the iTax platform before being granted the business permit. This would go a long way in increasing visibility for KRA on those doing business in the informal sector.
With the implementation of these new taxes, we shall see if KRA will manage to raise the number of active taxpayers from 3.94 million to seven million as provided in its 7th Corporate Plan.
Uganda’s presumptive tax threshold is for those taxpayers whose gross turnover in a year falls below US$40,000. However, a resident taxpayer who is in the business of providing professional services such as medical, architectural, engineering, accounting, legal, public entertainment services among others is not covered under this regime. For taxpayers whose gross turnover is below US$14,000 the amount of Presumptive Tax payable is determined by the nature and location of the business.
In Tanzania, presumptive tax is applicable to resident taxpayers whose annual gross turnover does not exceed US$45,000. The rate of tax is based on the turnover of a taxpayer where the Income Tax Act provides the tax bands and the applicable tax rates.