SMEs in Kenya constitute over 90 per cent of all registered businesses, create 80 per cent of the total employment and contribute 30 per cent of the country’s GDP. Yet, they continue to face numerous challenges including lack of credit, poor infrastructure and markets, punitive policies, a tough business environment and a lack of information and advice to make informed decisions. These difficult conditions are to blame for the closure of 46 per cent of small businesses within the first year of setting up shop.
Against this backdrop, SUN Business Network (SBN) Kenya members working to address nutrition and food insecurity attended a meeting on 11 March 2021 to discuss the issues, challenges and successes of SMEs in the local food system. The event provided these SMEs the opportunity to improve their understanding of tax compliance procedures, share challenges on tax compliance, advocate for their own interests and determine the best way forward. The gathering was convened by the Global Alliance for Improved Nutrition and World Food Programme and was attended by private sector entities, development partners and government agencies. The purpose of the event was to deliberate on the milestones and challenges that have stood in the way of scaling up nutrition in the country and to identify ways the various organisations can work together to create an enabling environment for small businesses in the nutrition sector to thrive.
Guided by the SBN Kenya Strategy 2019–2023, which enlists the support of the private sector to address malnutrition, the forum sought to discuss and offer insights into what businesses and entrepreneurs need to do in order to be investable, innovative and sustainable in their operations. “Under the Strategy we have five key pillars that guide all our interventions. The forum was organised under Pillar 4 which calls for policies and advocacy to create an enabling business environment especially for women-owned businesses, and to ensure the businesses are complying with the stipulated laws and regulations,” says Charles Opiyo, the SBN Kenya Country Coordinator.
Turning towards tax compliance
SMEs in Kenya, as in many other countries, often grapple with a complex tax regime, poor record keeping, limited information and prohibitive tax rates that discourage them from fulfilling their obligations. “One of the key agendas for the meeting was having a discussion about the tax regime, specifically on how our members can be tax compliant, as we are keen to have them operate their businesses in the right away. By bringing a representative from the Kenya Revenue Authority (KRA), we sought to open the forum to allow members to raise their concerns and deliberate on the key tax issues that affect their businesses,” Charles explains.
Susan Njeri, the KRA representative, took members through the various corporate tax obligations for entrepreneurs and businesses, while explaining the penalties and costs of defaulting. She also introduced members to newly introduced taxes and programmes and explained their implications on small businesses. For example, “KRA has introduced a minimum tax targeting small businesses and entrepreneurs. This base tax on income is pegged at 1 per cent of the total sales of a business, and applies whether one makes a profit or not. This tax targets SMEs because it does away with complex business records that are a challenge for a lot of SMEs. At the end of the day, we want to make tax obligations as simplified and non-laborious as possible,” Susan explains.
Addressing SME compliance concerns
The event also provided SBN Kenya members a chance to discuss and raise awareness of personal challenges they have faced with various taxes, duties and levies. For example, Dennis from Isiolo County, who operates a chicken processing facility, sought interpretation from the KRA representative as to why grants received by small businesses and entrepreneurs are treated by the government as taxable income. These grants are typically used to boost capital by buying equipment and to cover other costs of running a business, yet they are still subject to tax.
A representative of an online grocery store, Soko Kijiji, that delivers orders to homes and offices in Nairobi County through digital marketplaces, was keen to learn about the Digital Service Tax introduced at the beginning of 2021. This tax is charged on income accrued from the provision of services through an online marketplace. According to this individual, there was confusion about whether it was double taxation to have tax collected from both his platform and from the marketplace where he was selling, considering they were being delivered to the same customers.
According to the KRA representative, Soko Kijiji as an online grocery shop offers a digital service of selling produce to customers, and as such is bound to pay digital tax as an online entity (service provider). Meanwhile, online marketplaces, like Jumia which it has entered into a distribution agreement with, are also subject to digital tax separately – as individual entities – since they, too, are offering an online service. Thus, this is not ‘double taxation’, but rather the charging of tax on two separate service providers.
The forum also sought to address growing concerns over the duplication of charges across Kenya’s 47 counties due to a lack of tax harmonisation. For example, an SME buying cereals from one county, then transporting them to a different county for processing and bagging before selling them to another county is forced to pay three separate taxes to the county governments. The forum discussed the need to harmonise taxes across the counties to ease the cost of doing business and allow SMEs to trade with each other. Susan explained that this was a county issue, as each county implements its own levies and taxes, and encouraged members to advocate for more streamlined and harmonised taxes through dialogues with county governments.
In order to push governments to consider tax concessions for SMEs to cushion them from shocks and advocate for responsive policies and tax systems, the network is planning to establish SME advocates who will be tasked with advocating for favourable tax policies with the government and legislators.