Taxing the Informal Sector in Kenya: The Case for Presumptive and Turnover Tax

3 years ago by Onyari Nyakundi. PhD

Abstract

Taxation from the informal sector has essentially drawn genuine consideration dependent on the limited income potential this area has, the significant expense of duty collection, and the unfriendly effect the tax collection has on the firms. In any case, current studies have essentially underscored the circuitous advantages of informal tax collection as far as economic growth, administration, and broader tax compliance is concerned.. Subsequently, in view of the political and regulatory motivations for changes, and resident for state anticipating tax collection, the acknowledgment of the informal taxation requires an all-encompassing methodology that places into thought the wide range of various elements of concern. This paper is consequently outfitted towards tending to the two key taxation scenarios for the informal sector in Kenya; Presumptive and Turnover tax.

Problem Statement

According to Karanja (2018), both presumptive and turnover taxation on the informal sector poses significant challenges in terms of equity and direct revenue implications. While informal taxation appears to be a potential source of income to the government, revenue received is usually comparatively modest. The informal sector is often characterized by low incomes and comparatively lower tax rates (Munjeyi, 2017). However, the cost of tax collection is usually high with a significant challenge in the extent of tax collection monitoring. Moreover, informal tax collection also raises equity concerns based on the status of the players in the informal sector and their income bracket.

Objectives of the study

The key objectives of this study are to understand the revenue needs of the government and the needs of the informal sector in terms of its growth and governance. Additionally, this study will highlight the significance of the informal sector taxation and its implication on the vulnerable informal sector firms affected.

Justification of the study

The growing attention to the imposition of taxation in the informal sector is often based on the potential for growth and revenue development in the sector (Ogembo, 2019). However, more often, direct benefits accruing from informal sector taxation are often relatively modest; while the implications for vertical equity are potentially unfavorable.