The Kenya Revenue Authority (KRA) has reorganised its corporate governance structure to “enhance operational efficiency, optimise processes and streamline administrative procedures within the tax administration”.
The key focus area of the “organisational reforms” was the creation of a full department to focus on small traders who have over the years been said to be elusive in complying with various tax provisions.
The taxman says the Micro and Small Taxpayers Department will augment efforts to grow tax base at a time options for new taxes are limited. It has in the past classified MSMEs as a “hard-to-tax” sector.
The KRA did not define the individuals and businesses will fall under the new department. There are different definitions of micro and small enterprises.
The KRA has in the past, however, defined small traders as those with annual sales of less than Sh5 million, and are semi-organised and operate in unregulated environment.
What taxes are small traders obligated to file and pay?
Under Section 12 (C) of the Income Tax law, a resident individual or business whose gross annual income is expected to be more than Sh1 million and not more than Sh25 million is expected to pay a turnover tax.
The turnover tax is charged at the rate of 1.5 percent of gross sales under Finance Act 2023. It is a final tax and, therefore, no expenses are allowed for deduction.
This tax does not, however, apply to individual or businesses which earn rental income (landlords) or management, professional and training fees where taxes are administered under a different framework.
Additionally, businesses or individuals supplying taxable goods or offering services whose annual value is expected to be Sh5 million or more are required to register for value-added tax obligations.
Why establish a unit dedicated to MSMEs?
The KRA has not officially provided clear on the reason for setting up a department to support small traders and enhance compliance.
Insiders, however, said it was part of the recommendations made by MSME Tax Base Expansion Task Force.
In its four-year 9th corporate plan for the period ending June 2029, KRA says MSMEs are key in helping it hit targets under tax base expansion programme.
The agency has set sights on growing the taxpayer base by four million to 13 million active taxpayers by June 2029. It plans to achieve the target through “tailored support frameworks that bolster tax compliance of dynamic sectors such as the digital economy, agribusiness and the MSMEs”.
Who was in charge of MSMEs before the setting up of a new unit?
There was no dedicated team under the KRA corporate structure for small traders, unlike the Large Taxpayers Office, Medium Taxpayers Office and Public Sector Division.
What is likely to change with establishment of the new MSMEs unit?
The elevation of tax administration for MSMEs to a department is likely to come with increased resources dedicated to a sector which largely operate in informal setting with little or no regulations
. This will see more cash and personnel being channelled towards supporting small traders to comply with tax obligations. A department within KRA has traditionally been headed by a commissioner, the second-highest ranking position under the Commissioner-General.
However, KRA has not disclosed whether or not the department will be headed by a commissioner. It, however, says the change will “facilitate tax compliance through efficient administration, technology-driven solutions and service excellence”.
What makes taxing small traders challenging?
MSMEs grapple with a range of challenges that impede their compliance with tax regulations. The Ministry of Co-operatives and MSMEs has cited informality as posing the biggest challenge to track and regulate activities of small traders.
The small traders also largely rely on cash transactions, which hinders auditing and monitoring their financial dealings. This is made even harder by little, if any, record-keeping practices, undermining the ability of agencies such as KRA to get accurate financial records.
There is also a digital infrastructure gap among small traders, with majority of MSMEs “lacking access to digital tools and the necessary knowledge of modern tax systems”.
How does KRA plan to enhance tax compliance?
KRA says it will implement initiatives such as customised tax education programmes, on-site facilitation and collaboration with various government institutions such as Huduma Centres to bring services closer to small traders.
What has been done to formalise small traders?
The State Department for MSMEs has been encouraging small traders to register through Micro and Small Enterprises Authority to access State facilitation, including funding and training. This has enhanced visibility and streamline tax tracking, according to MSMEs ministry.
This saw the number of micro and small businesses registered by MSEA surge to nearly 2.26 million due to linking of the MSEA “database to the Hustler fund group loan product/sand onboarding the Authority’s registration services to the e-citizen platform”.
