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KRA ON MICRO AND SMALL ENTERPRISES
KRA ON MICRO AND SMALL ENTERPRISES
Description
KRA establishes MSME department to expand tax base, with turnover tax and VAT obligations for businesses.
KRA ON MICRO AND SMALL ENTERPRISES
The Kenya Revenue Authority (KRA) has reorganized its corporate governance structure by establishing the Micro and Small Taxpayers Department which aims to grow the tax base at a time when options for new taxes are limited. Previously, there was no dedicated team under the KRA corporate structure for small traders, unlike the Large Taxpayers Office, Medium Taxpayers Office and the Public Sector Division. The KRA, through the MSME Department, has set sights on growing the taxpayer base by 4 million to realize 13 million active taxpayers by June 2029.
What are MSMEs in Kenya?
Micro-And Small enterprises refer to businesses that fall within the category of small and medium-sized enterprises, characterized by limited sales turnover, balance sheet size, paid-up capital, and number of employees, varying across different countries based on economic needs and criteria. MSMEs play a pivotal role in the growth and development of any economy. In Kenya, MSMEs are an essential component of the economic landscape, contributing significantly to employment generation, economic growth, and development. The KRA has in the past defined small traders as those with annual sales of less than Sh.5 million, are semi-organized and operate in an unregulated environment.
Tax obligations for MSMEs
Under Section 12(C) of the Income Tax Law, a resident individual or business whose gross annual income is expected to be more than Sh.1 million and not more than Sh.25 million is expected to pay a turn-over tax. Under the Finance Act 2023, turnover tax is levied at a rate of 1.5% of gross sales. It is a final tax, and therefore no expenses are allowed for deduction.
Exceptions
This tax does not apply to individuals or businesses which earn rental income (landlords), or management, professional and training fees where taxes are administered under a different framework. Landlord are subjected to MRI (Monthly Rental Income), levied at a rate of 7.5% which is a final tax exclusive of those who opt to implement the old regime of taxing rental income. Persons earning management, professional and training fees are subjected to withholding tax at various rates depending on the residence status. Additionally, businesses or individuals supplying taxable goods or offering services whose annual value is expected to be Sh.5 million or more are required to register for the Value Added Tax (VAT) obligation levied at either 0% (zero-rated items) or 16% (taxable items).
Challenges
MSMEs are faced with a myriad of challenges that impede their compliance with tax regulations. The Ministry of Co-operatives and MSMEs has pointed out informality as the biggest challenge to track and regulate the activities of small traders. Majority of the traders rely on cash and mobile money transactions which hinders auditing and monitoring their financial dealings. There is also little, if any, record keeping practices and this undermines the ability of agencies such as the KRA to get accurate financial records. Another challenge is the digital infrastructure gap, where majority of MSMEs lack access to digital tools and the necessary know how of modern tax systems such as the iTax platform and ETIMS.
Enhancement initiatives
The KRA is focused on implementing initiatives such as customized tax education programmes, on-site facilitation and collaboration with various Government institutions such as Huduma Centers to bring services closer to small traders. The State Department for MSMEs is also expected to enhance efforts of registering small traders with the Micro and Small Enterprises Authority (MSEA), a state corporation whose overall mandate is the promotion, development and regulation of micro and small enterprises in Kenya. This will enable the traders to access state facilitation, which will include funding and training, capacity building, and market access and infrastructure development. Such measures will be vital in enhancing visibility and streamlining tax tracking
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