Taxation of Smes in Kenya as a Tax Base Broadening Measure Is It a Mere Tax Collection Exercise?

Abstract

The history of the growth and taxation of SMEs is long and dates as far back as 1950s. Initially, the informal sector was regarded as marginal and peripheral. But with time, the sector expanded and became a source of livelihood and a potential taxpayer. With this realization the Government incorporated the sector in its national policy to develop the sector. Later, the focus shifted to tax SMEs to expand the tax base. Tax base broadening would yield; increased tax revenue; and lessening of the tax burden. But at the time there was no legislative framework in Kenya for taxation of SMEs. It was not until 2007 when turnover tax was introduced through section 12C of the Income Tax Act and the Income Tax (Turnover Tax) 2007, Rules. The 2008/09 Report by KRA on tax collected during the period shows that these Rules have not been effective in the taxation of SMEs as the projected revenue from SMEs was not realised. The objectives of tax base broadening and eventual lessening of tax burden have receded to the background. The rules failed to capture as many SMEs as anticipated, largely due to the many shortcomings in them among them being; failure to isolate and identify the particular SMEs targeted for taxation, categorize them depending on the nature of business activity by each, apply differentiated rates of taxation, provide for appropriate turnover assessment methods and thresholds, introduce necessary and appropriate incentives, and make the system as simplified as possible so as to attract voluntary tax compliance. These measures if taken will invariably strengthen the rules as to capture as many SMEs into the tax net thereby broadening the tax base; lessening the tax burden; and increasing revenue