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Reintroduction of Turnover Tax is one way of formalizing the informal sector

By Faustin Mwinzi; taxdon

Colonization and civilization are two sides of the same coin, one eliciting memories of torture and dehumanization while the other bringing hope and prosperity to the land once known as a free country (Africa). Native Africans lived in this free country on what nature could provide. The only resemblance of an economic activity was barter trade.  Then came the missionaries and colonists who found a mass that attached no value to the little copper pieces known as money. The colonial masters had to device a way of making money a necessity to these natives.

They found one in poll tax or hut tax. Colonial taxes were not meant for funding the exchequer but were a means of subjugating Africans to labour to earn money solely for the purpose of paying taxes. Later, Africans would discover the power of money. Needless to say, the formal economies we see would not have been without these crafty taxes. Taxation is not just about revenue, it’s unparalleled instrument of the state for steering the economy. Let me draw a parallel between the pre-colonial economic system and our current system.

Kenyan economic system is largely informal. It is a thriving sector yes, most of the jobs are in this sector, and the volumes of transactions in the sector are humongous. However, it is difficult to document the worth of this sector, even the traders might not be able to tell exactly what they own or owe.

External financing to this sector is also almost impossible due to the unorthodox models of operations adopted here. Resources and extension services may not be availed to desired levels because the needed information may be lacking. The benefits of pooling capital and the resultant economies of scale effect cannot be enjoyed in this world of every man for himself.

Succession is the greatest nightmare because most of the outfits are unregistered with their operations undocumented. Given the nature of the informal sector as described above, attempts to tax the proceeds from this sector has been a wild goose chase for the government as well.

Micro, Small and Medium Enterprises or the hustlers  nation as they call, it is a blessing to our generation but needs to be nurtured to the next level. The first step is formalizing the informal sector. Introduction of a tax that ensures that the sector also contributes in the national revenue kitty is an important formalization facet.

What does taxation have to do with formalizing the informal sector? The recently reintroduced turnover tax may turn out to be a blessing in disguise. Turnover tax coupled with presumptive tax, which is charged at the rate of 15 per cent on annual single business or license fee, has been criticized as punitive to struggling enterprises. Should we let proponents of this idea discourage us?  Not again. Turnover tax should not flop as it did in the years 2007 to 2018. First, I opine that some of the enterprises are not as small as one would like to imagine. It is a multibillion sector that has created filthy rich barons who have operating their enterprises  tax-free. However, that’s a topic for another day.

Now to the big picture. The imposition of turnover tax if rightly implemented will make a demand on the informal businesses to reorganize their affairs. A systematic way of determining the gross turnover has to be devised. A well regimented system of accounting may be too much to ask of them but an innovative idea is long overdue. Probably we enforce a strict system of receipting and capturing of transactions such as the Electronic Tax Register (ETR) used in the Value Added Tax (VAT) regime.

A much simplified fashion but along that line of thought is a prophecy that must come to pass.  The idea is, as the government collects the three per cent tax,a lot of information will be generated and left at the disposal of the traders.That way, revenue leakages may be sealed by a well-functioning sales recording system. As a result, substantial and valuable data will be gathered in the process for the benefit of all stakeholders. Just in the same manner poll tax introduced money economy back in the day, turnover tax will introduce formal procedures in the informal sector.

As I noted earlier, taxation is not just about revenue, it is unparalleled instrument of the state for steering the economy. That’s the Bigger picture.

The writer is a Lecturer at KCA University.