This archive report was first published on 11 January 2020.
As I navigated the bustling streets of Nairobi's informal sector, I was struck by the sheer volume of business transactions taking place in small, unassuming shops. These micro-outlets, often no larger than 2m by 7m, were bustling with activity, with customers haggling over prices and vendors eager to make a sale. What struck me, however, was the lack of receipts and the absence of VAT receipting. It was clear that these businesses were making a profit, but the government was missing out on a significant source of revenue.
According to the Finance Act 2019, signed into law by President Kenyatta in November 2019, the Turnover Tax was reintroduced on January 1, 2020. This tax targets businesses with an annual turnover below Sh5 million and not registered for VAT, levying a rate of 3% on their turnover. The tax had previously been introduced in 2018 but was withdrawn following an outcry. However, I believe the withdrawal was largely due to the need to collect data on taxpayers in this sector, rather than a response to public pressure.
While some have criticized the tax as a burden on the poor, I argue that the reality is more nuanced. These small business owners are not poor; they are making a profit, but the government is not benefiting from it. In fact, those operating in the formal sector, who are subject to a 30% tax on their profits, are effectively carrying the tax burden for millions of informal sector operators. It is only fair that as many Kenyans as possible contribute to the tax base, especially when the state is struggling to meet its tax targets.
The Turnover Tax is a final tax, meaning once paid, a business has no further tax obligations. Additionally, the cost of compliance is low, requiring only a record of sales. This is in contrast to the formal sector, where businesses must keep detailed records of expenses to reduce their tax burden. By introducing this tax, the government is encouraging more businesses to come forward and contribute to the tax base, which can only benefit the economy in the long run.
