A raft of changes is expected following the presidential assent to the Finance Bill 2022 making it operational as law. Among the types of taxes affected by these new changes include the Excise Duty, Value Added Tax, Income Tax, Fees and Revies among others. Still many SMEs remain non-compliant despite the punitive tax penalties and administrative costs. Consequently, the non-compliance ends up denying the government the much-needed funds for development projects and recurrent expenditure financing. Although the stringent provisions in the Act are expected to net more income for the taxman, the underlying concern should be why most Kenyan SMEs are non-tax compliant.

In Kenya, SMEs have been known to play a critical role in achieving the desired rates of economic growth and employment figures. For this reason, the SME is a priority sector in Kenya’s growth and development as it contributes a massive 70 per cent of gross domestic product (GDP).

Small and medium-sized businesses (SMEs) play a crucial role in the mobilization of domestic savings for investments, a significant contribution to the GDP, and increased utilization of local raw materials. SMEs also support job creation, a significant contribution to efforts to reduce poverty through the creation of sustainable livelihoods, an increase in employee income, technological advancement, and export diversification.

Ideally, SMEs can be considered as the seeding ground for local entrepreneurship with many large corporations having started out as small and medium enterprises. However, due to the volatility of the business environment in which they operate many SMEs choose to remain informal to avoid the perceived high tax compliance costs. Since they are profit-generating entities, SMEs are expected to pay their taxes dues which doesn’t often happen voluntarily.

In this regard, it has been argued that perhaps SMEs should be given special treatment given their volatile environment to enhance voluntary compliance. Another idea being fronted is for the government to tax these establishments such that they are left with enough resources at their disposal for growth rather than suffocate their entrepreneurial initiative.    

Nonetheless, it is evident that the complex filing procedures and the high tax rates are the biggest factors for tax non-compliance by SMEs. Also, there is the issue with the multitude of tax classes on which the SMEs are not properly enlightened. Should SMEs, therefore, be taxed at a lower rate? Would such an incentive promote voluntary compliance or perhaps increase the chances of survival for the SMEs?

My view is that as a feasible approach, the government should consider certain tax incentives for SMEs like Tax Holidays and special exemptions. This would not only encourage the entrepreneurial spirit but will also encourage voluntary compliance. Meanwhile, tax administration and compliance costs will continue to be a challenge to many businesses. And should the taxman impose hefty penalties for non-compliance, many SMEs would likely never recover.

With more stringent provisions in the Finance Act, of 2022, the government should give more attention to the SME sector by encouraging tax compliance. Although the cost of doing business would increase with tax administration costs, the government can increase compliance through tax incentives. Besides creating a level field for SMEs and large establishments, such interventions would also ensure that a good number of SMEs start paying their taxes due.

Being the largest player and contributor to the GDP, it is only proper that the SMEs should contribute their fair share in financing development projects and recurrent expenditure by paying taxes.