Government urged to tap into the informal sector to increase tax collection

The government needs to widen the tax base from the usual income tax through Pay As You Earn (PAYE). A panel discussion on Taxation and Bottom-Up Economic Model heard that the government should push for the formalization of the informal sector to increase tax collection.

‘‘The government should take steps to bring informal economy into formal fold because there are many advantages, one being that policy transmission is easier and data is available,” said Tony Murega, accountant and lecturer in economics and consultant on Micro and Small Medium Enterprsies(MSMES).

He said that the government needs now is data driven evidence. “… because you cannot make policies or plan on a sector of the economy where you have little data or information about it.’’ The panel discussion called was organized by Kenya University’s Centre of Excellence in Tax Education. Kwame Owino, chief executive Institute of Economic Affairs and Prof Vincent Ongore, Associate Professor, Business Administration & Entrepreneurship (DBAE) were also in the panel. Faustin Mwinzi, director, the School of Professional Programs at KCA university was also present.

KCA Deputy Vice Chancellor Prof Joshua Bagaka’s welcomed the panel discussion saying such events give students a chance to engage in several issues and discuss current issues like taxation. Murega said the other advantage bring the informal economy into the formal fold is that it broadens the tax base. He said at the moment, the tax base is narrow with PAYE tax accounting for only about three million people on formal sector, yet the informal sector has no payroll access. “However, you cannot tax the informal sector because KRA has no capacity or machinery to go after every person to assess the tax that is due,’’ Murega added.

He explained that an informal economy (informal sector or shadow economy) is part of any economy that is neither taxed nor monitored by any form of government and accounts for 83.4 per cent of total employment. Murega explained that so far, there are only six million registered taxpayers, of whom three million enjoy formal employment while another three million work in the informal sector. An estimated 15 million informal workers, however, are not covered.

Faustin Mwinzi, director School of Professional Programs at KCA university said that the informal sector is missing a lot and need to be educated so that they enjoy the benefits that come with the formal business. He said these benefits include getting bank loans and being able to do business with the government. ‘‘The business model in Kenya is individual-based and is either family business, one or two people running a business, so if these business people would come together, pool resources together, they could for instance buy more motorcycles and have a bigger enterprise that can create more jobs and pay taxes,’’ he said.

Kwame Owino, however, said there is no formal economic model called bottom up but it’s just the government taking priorities and interventions to people at the bottom. He said there is need to have moderate tax rate that is spread over to many people as possible and taxes should not just be increased but ensure compliance. ‘‘We also need to separate between income and consumption taxes and the latter should be spread even more. Also, for both, government should have different approaches,’’ he said.

Prof Ongore, said the fact the country is cash-based has prevented KRA from collecting tax properly but noted that with digitization, it might bring tax administration efficiencies since it will deal with traceability. ‘‘Cash economy is not good for the country because many people are involved in activities that cannot be traced by the taxman. For instance, someone coming with cows from northern Kenya to sell in Dagoreti in Nairobi, there is no way government can know how much he earned,’’ said Prof. Ongore.

He welcomed the Digital Service Tax law, which came into effect on January 1, 2021, and targeting revenues earned by digital service providers including US tech giants Google, Netflix, Meta, Twitter and Microsoft. He said, this will ensure traceability of taxable transactions.

An economist and former employer with KRA, Prof Ongore blamed the taxman for inefficiency in tax administration systems despite having the best technology in the continent ahead of South Africa.

‘‘KRA has the power to collect more taxes but they have not told Kenyans the reasons they need to pay the taxes, if Kenyans see the value of paying taxes, they will pay without even being forced,’’ he said.

Story filed by Standard Digital Newspaper on 23/2/2023 and Printed version on 25/2/2023.