The Kenya Revenue Authority (KRA) is seeking repeal of a law that spared small businesses and farmers from the electronic tax invoice management system (eTIMS) for undermining efforts to widen the tax base and catch cheats.
The law that took effect on December 27 last year freed firms with annual sales of below Sh5 million from issuing electronic invoices, removing a compliance hurdle that had made it difficult for micro traders to supply big companies with goods and services.
But the KRA reckons that the exemption has slowed down its bid to rope the hard-to-get informal traders into the tax bracket, denying the government income.
The authority says 41 percent of the targeted non-value-added tax registered taxpayers have onboarded eTIMS, erecting a hurdle in tracing economic transactions.
Before December 27, the law demanded that all suppliers, regardless of their size, issue an electronic invoice to show proof of sales, which would also be reflected at the KRA as an expense for the big firms buying goods and services.
This enabled the taxman to track the sales of the small traders while keeping tabs on the big firms, which helped curb the practice of companies inflating their costs to lower tax obligations.
Big firms were dropping small traders without the ability to generate eTIMS as their suppliers in the push to be compliant with the law, prompting the change in regulations.
Now, the big firms buying goods and services from suppliers with annual sales of less than Sh5 million are responsible for producing the electronic invoice.
“We proposed that we do not have a threshold since it is all systems-based now and we thought it was a no-brainer until the Tax Procedures (Amendment) Act 2024 came and that was a setback because we have offered multiple simplified solutions,” Rispah Simiyu, the Commissioner for Large and Medium Taxpayers at the KRA, told the Business Daily.
“What this has meant is that small businesses are only transacting among themselves and remain shut out by large and medium businesses. We do hope that some amendments will come through.”
The Finance Act, 2023 required businesses to issue electronic tax invoices through eTIMS.
Expenses not reflected on eTIMS would not be accepted as costs for the calculation of corporate income tax in efforts to curb tax cheating.
The system, which demands businesses to file receipts or invoices with the KRA as proof of expenses, is aimed at widening the tax base as big companies report to the authority small firms that act as their suppliers.
It also helps curb the practice where big firms inflate their sales and narrow profits in the push to pay lower taxes.
“In our books, we had 253,000 VAT-registered taxpayers, and when we started the journey of eTIMS, we began by targeting them because they were already registered. Of this, we have about 173,000 on board, that’s about 68.0 percent,” said Ms Simiyu.
“With the rollout of eTIMS, we then onboarded non-VAT registered taxpayers, and our initial target was 661,000, of which we successfully onboarded 271,000, so about 41.0 percent.”
The use of electronically generated invoices is a key pillar of the KRA’s quest to increase the number of active taxpayers on its roll from the 9.67 million at the end of June last year to 12.27 million in 2028.
This is in line with the target of collecting Sh4.59 trillion by June 2028 from Sh2.41 trillion it clocked last year.
Tax consultants attributed the low uptake of eTIMS, before the review of the law in December, to the majority of smaller firms “lacking the technical infrastructure or understanding to comply swiftly”.
Small and medium-sized businesses are the backbone of Kenya’s economy, generating the bulk of jobs in a country where the formal sector is struggling to create employment for thousands of graduates.
The informal sector accounted for 85 percent of all jobs created last year, at 720,900 jobs, compared to 122,800 created in the formal sector.
Businesses whose annual sales are less than Sh5 million fall outside the bulk of corporate taxes, including being spared registration for VAT.
Analysts at PwC had cautioned that small businesses would run into headwinds in dealing with other businesses on eTIMS compliance.
“It is noted that no consideration has been given to small businesses that deal with other businesses; as such, businesses may be challenged in raising eTIMS compliant invoices or carrying out reverse invoicing,” PwC said in a note.
eTIMS is a software solution that provides taxpayers with options for a simple, convenient and flexible approach to electronic invoicing.
