Kenya: Small Traders Urge KRA to Remove Tax Load as COVID-19 Bites

Maureen Kiano, a hotel owner operating in Nairobi's central business district, has recently experienced the toughest weeks in her five-year career as a hotelier.

With the outbreak of the deadly coronavirus (Covid-19), she is grappling with how to meet her rent and pay among other levies, the turnover tax (Tot) amid the heavy losses she has incurred.

Unless the government declares otherwise, Kiano has no choice but to pay the turnover tax since her business falls in the category of those making total annual revenues of Sh5 million and below.

It does not matter whether she sells at a profit or a loss, she must remit the tax if she is to remain in the good books of the taxman.

Initially, the turnover tax for SMEs was three per cent of gross sales. President Uhuru Kenyatta has proposed to parliament to reduce it to one per cent as part of its initiative to aid traders like Maureen carry on with business during these unusual times of Covid-19.

Much as she appreciates the government's efforts to try and meet her halfway, she still feels the tax has come at the worst time, when she has switched on the survival mode gear of her business.

LIMITED HOURS

She is not sure how long she will continue affording rent. Her biggest nightmare is keeping her staff on the payroll at this time when sales are at their lowest in more than a decade.

Kiano feels the most reasonable thing the government can do is to reduce any burden on her shoulders to help her keep her doors open.

One of the ways to do this is to scrap the entire turnover tax load altogether, given that everything has conspired to deny her customers and she is just struggling to stay afloat.

The dusk-to-dawn curfew has only made an already bad situation worse.

Whereas she used to open at 6am and close at 10pm, she now opens at 10am and closes her doors latest at 5pm, to be at home in time or risk coming face to face with the brutal police out to enforce the curfew.

The few customers she now receives no longer sit down. They simply buy what they need and leave as fast as they came in.

Takeouts have become the new norm. But unfortunately, like several other SMEs, she lacks the capacity to do home deliveries.

FEW CUSTOMERS

Kiano represents thousands of other small and medium hoteliers in the hard-hit hospitality sector, and she just does not see how things can get tougher than they already are.

"First, there is the catering levy that takes up two per cent of the money I make on every single sale, regardless of whether I have sold at a loss or not; then there is the high price of commodities as a result of VAT," she said.

"In this business, you can never predict your day. Take the locust invasion for instance that has presented food vendors a perfect excuse to hike prices of some supplies," she said in an interview.

"It is difficult to convince a customer to buy a plate of food at a higher price because prices of raw materials have also hiked. If you tell them that, they move elsewhere and you lose that customer," she added.

Kiano's counterpart in the hospitality industry, Timothy Ondieki, finds himself in a similar predicament.

He runs his hotel near the Technical University of Kenya. He also wants the turnover tax to be scrapped.

His main customers, the university students, are no longer around to buy from him because all schools and campuses were closed indefinitely in a bid to contain spread of the coronavirus.

This and the burden of several other levies he has to pay are making Ondieki a very anxious man.

"Already, I am facing constant harassment from county council officers at the end of every month to pay 'kanjo' fees. On average, I pay my workers Sh500 a day. These are people who have families and people they are looking after," he said.

WORKING SUGGESTION

Ondieki says that as he is now virtually out of business, there is no point for the government to still impose the turnover tax on him.

Hospitality is not the only hard hit segment in the SME sector. The Information and Communication Technologies (ICT) sector, which employs a majority of the youthful population, is also having to contend with low sales.

Since the coronavirus has affected importation of technological equipment from major manufacturing hubs such as China and the US, as an alternative, traders are having to import equipment from more expensive hubs such as Dubai.

They are then forced to pass on the extra costs to customers, but as most customers cannot afford to buy the products due to the current economic downturn, the traders are not making enough sales to meet the costs of their operations.

As a solution to help traders in the ICT sector, Felix Mbugua, an ICT consultant who also runs web design firm Legibra, suggests that besides scrapping the turnover tax, the government should impose a single and specific tax on every business as opposed to having several taxes at once.

"Most businesses operate at a profit margin of about 30 per cent on the higher side. So for 100 shillings, you get a profit of Sh30. Imagine what an additional tax would do to this small margin," said Mbugua.

"In my line of work, when I offer ICT consulting services, I am required to pay a consultancy fee of 10 per cent of the total amount I am paid. If I am to deliver ICT goods, then I am required to pay a value added tax of 16 per cent, now 14 per cent on every sale," he added.

TOUGH ECONOMY

Mbugua further claims that as ICT employs mostly the youthful population, imposing such taxes as the turnover tax would go against efforts made to reduce youth unemployment.

ICT has been exempt from normal taxation because of a zero-rating initiative that was launched by the government to promote digital businesses in Kenya.

Many computer shops have cropped up in Nairobi's CBD because importing computers has remained tax exempt, and so the only other levy computer vendors have been required to pay is the business permit fees.

This has opened the door for many young people to do computer businesses and at a considerable profit.

Cyril Onyango, a computer vendor operating on Kimathi Street, is one such beneficiary. He, however, fears that soon he may not be so lucky.

"The electronics business has been plagued by low returns as a result of an economic downturn that has continued to affect the entire country. Accessing basic commodities such as food has become an issue for many Kenyans, and, therefore, purchasing electronic equipment is not a priority," said Onyango.

"If I start paying any more taxes as it is, I will have to close shop. But where will I take all these equipment if I do; how will I pay back bank loans. You cannot expect someone who is operating at a loss to comply with new taxes such as the turnover, and especially at such a time when the economy is already taking a dip," he added.

TAX SYSTEM

Besides a tax waiver, Onyango suggests that once business resumes to normalcy, then government should consider taxing profits as opposed to taxing sales, arguing that this would enhance compliance and thus enable the government to at long last streamline collection of revenue from the informal sector.

How to streamline collection of revenue from the expansive yet elusive informal sector has remained a major mind cracker.

Collecting even just a little more money from a sector that employs more than 80 per cent of the population would be a big boost to the exchequer.

The State had hoped that introducing a simplified tax system - which would entail keeping records of sales made on a daily basis and then remitting taxes on a designated day of the month - would facilitate collection of more revenue from the SME sector, unlike the old system which involved preparing complex records of accounts then filing returns at the end of the year.

But such has not been the case. Many small-scale traders are content with paying only the business registration licenses. And the idea of an extra tax, however gloriously painted, is not enticing.

Ruth Karanja, a fruits and vegetables vendor in Nairobi's Marikiti market, is one such trader.

With proposals for the government to close all open-air markets, and a lot of her customers no longer coming into town to buy produce from her, even the decrease of turnover tax from three per cent to one per cent is not enough incentive for her to be able to carry on with her life as usual, however well intended the initiative by the government is.

BROKEN PROMISES

Furthermore, the thought that the taxes she pays are not being channelled to the right avenues makes her feel reluctant about complying.

"Whenever they come around collecting levies, they tell us that the money is being used to provide better working conditions such as improved road network. For the 10 years I have been selling here, I am yet to see any improved working conditions here," said Karanja.

This is a sentiment shared by Roy Muhia, a tattoo artist operating on Moi Avenue.

Muhia maintains that much as he has been filing his tax returns, he is not pleased with how his money is being spent considering how much, together with several other levies he has to pay, the turnover tax is eating into his profits.

"Just look outside my shop. There is litter all over the place. It presents a bad image for my business, but it is not my fault," he said, pointing to a pile of garbage near the entrance to his shop.

Nairobi has been facing a management crisis that has seen county staff go on strike as a result of unpaid salaries. These include cleaners mandated with keeping the city tidy.

FINANCIAL CRISIS

As a result, many parts of the city have remained painted with litter.

Such matters as maintaining hygiene are the key issues that are going to determine how our country fairs in the fight against the coronavirus.

Francis Wanda, a financial analyst, holds the view that taxes such as the turnover tax have instead of boosting the exchequer's revenue, created a financial crisis that has seen liquidity go down.

He says that as more businesses are opting not to register and obtain licenses, most of the money they make, they remain with it in cash.

"If you impose a tax such as turnover this time, many small businesses will opt to keep their money in cash as opposed to banking it or saving on M-Pesa. This is because they know that these are the only areas KRA can monitor their transactions," said Wanda.

Indeed, the effect that an unregulated tax framework has on business prospects and thus by extension government revenue cannot be gainsaid.

Many investors are afraid to start businesses in Kenya because they are afraid of the heavy taxes that await them.

For those that do, a majority of them avoid registering for trade licenses.

It is for this reason that there are only 1.5 million licensed micro and small to medium-sized enterprises (MSMEs) in Kenya and over 5.8 million unlicensed MSMEs.

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