Kenya Government sends Taxman aggressively after Small Businesses as China Loans’ noose hangs tighter

Kenya Government sends Taxman aggressively after Small Businesses as China Loans’ noose hangs tighter

Starting January 2019, all small businesses in Kenya, going to renew their business permit or trade license, or apply for the first time, will be required to pay a new Presumptive Tax. This tax was non-existent in the previous years and was just recently introduced with the enactment of the Finance Act 2018. The bill for which was passed under very weird voting in parliament; those who voted against it were clearly many than those who voted for it, so it is not clear how it sailed through.

The Kenya Revenue Authority (KRA) wants millions of small businesses in the country to start paying the Presumptive Tax from January 1st, 2019. The tax will be a prerequisite to getting their business permit or trade license renewed or issued for the first time. The said tax will be 15% of the cost of the business permit or trade license.

In accordance with Finance Act, 2018, the Presumptive Tax shall become payable from January 1, 2019. All eligible taxpayers are advised to pay for the presumptive tax at the time of payment for business permit fee or trade license,” said the taxman in a public notice published in local dailies.

Persons acquiring or renewing business permit or license at the county shall pay this tax at the rate of 15 percent of the business fee or license payable… The taxpayers shall be required to generate a payment registration number on iTax after which they can pay through M-Pesa Pay Bill number 572572 or any other partner bank.”

The iTax portal is an online platform where taxpayers can go and file their tax returns and pay via mobile money or through partner banks. It was an innovation in the KRA system as it seeks to digitize its operation for quality service to users.

The Introduction of the Presumptive Tax

The Cabinet Secretary for Treasury, Henry Rotich, somewhere along mid-2018 went ahead and changed the law to make it mandatory for informal traders with an annual revenue of less than KSh. 5 million (about $50,000) to start paying a Presumptive Tax at a rate of 15% of the single business permit fee or trade license issued by the County Government. The fee will be paid at the time of fresh application or renewal of the said documents.

Previous to the enactment of the presumptive tax, the government had put in place a turnover tax. That failed because the majority of small traders do not disclose their revenues, making it difficult for the tax man to calculate the tax owed by each business.

Kenya introducing more taxes at a time when many SMEs are closing shop

Going by the 2016 government report, in the five years leading to 2016, about 2.2 million small businesses have had to close shop. The owners cite an increasingly tough business environment. The Kenya National Bureau of Statistics (KNBS) in a report titled Micro, Small, and Medium Establishments, says the majority of small business closing shop blame it to shortage of operating funds, increasing cost of operation, and declining income.

Taxman under pressure to meet Government Expenditures

In the year 2017, Kenya borrowed more from China than it did in the previous three years combined. As at the end of 2017, the country owed China at least Ksh. 980 billion, making it the third (about $9.5 billion). Making Kenya the third highest debtor of Chinese loan in Africa after Angola and Ethiopia who owe China Ksh. 4.28 trillion and Ksh. 1.37 trillion respectively.

China has rolled out a ‘Belt and Road’ initiative where it is pursuing countries in need of loans for infrastructural development. That ‘Belt and Road’ initiative has turned out to be ‘honey trap’ or ‘debt diplomacy’ for some countries.

China has been criticized for its readiness and willingness to loan to vulnerable countries followed by a hardball debt collection. It has been likened to Shylock in the William Shakespeare’s Merchant of Venice.

Take, for instance, Sri Lanka where China built a port using its own companies, materials, and workers. When the port was finished and Sri Lanka unable to service the loan, not from just the construction of the port but also other China-funded projects in the country. China moved in and acquired unlimited use over the port for 99 years as a payment for the loan.

In Africa, Djibouti too developed an insatiable appetite for loans from China. However, when the loans matured, the small country was able to repay the loans, and a result had to hand over the port constructed by China over to the Chinese government.

Economists have long raised the red flag that Kenya is under threat of not being able to service its loan to China. Those concerns might just be true, given the fact Kenya is currently borrowing to service some of its old loans.

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