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ITD CONFERENCE ON TAXING MICRO AND SMALL BUSINESSES

ITD CONFERENCE ON TAXING MICRO AND SMALL BUSINESSES “ CONCLUSIONS FOR TAX POLICY AND REVENUE ADMINISTRATIONS FROM COMPLIANCE STUDIES, PERCEPTION SURVEYS AND MICRO AND SMALL BUSINESS COMPLAINTS ABOUT THE ADMINISTRATIVE BURDEN OF TAXATION” SESSION 7 PAPER PRESENTED BY: FIDELIS K. MULEI

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ITD CONFERENCE ON TAXING MICRO AND SMALL BUSINESSES

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  1. ITD CONFERENCE ON TAXING MICRO AND SMALL BUSINESSES “CONCLUSIONS FOR TAX POLICY AND REVENUE ADMINISTRATIONS FROM COMPLIANCE STUDIES, PERCEPTION SURVEYS AND MICRO AND SMALL BUSINESS COMPLAINTS ABOUT THE ADMINISTRATIVE BURDEN OF TAXATION” SESSION 7 PAPER PRESENTED BY: FIDELIS K. MULEI COMMISSIONER, DOMESTIC TAXES DEPARTMENT KENYA REVENUE AUTHORITY

  2. 1. There have been various definitions of small and micro barriers including definitions by the following criteria. • Number of taxpayers Not exceeding 50 • Turnover Not exceeding ₤10 million • Assets Not exceeding ₤10million

  3. Micro and small business enterprises in Kenya. • Small scale activities • Semi-organised and unregulated • Use simple labour intensive technology • May or may not have licences or registration from local authorities or central government.

  4. Definition of SMEs in Kenya for tax purposes; • Presumptive tax regime defined by turnover TOT). • Any business with an annual turnover not exceeding Shs.5m or U$D62,500 is eligible for taxation under the presumptive tax regime • Businesses have a choice to opt into the formal regime.

  5. For considerations of fairness, we have excluded the following businesses from the regime. • Rental income • Incorporated business • Professional practioners • Employment.

  6. 2 In the 1970’s, small businesses were perceived as; • Marginal to main stream activity. • Habitual avoiders and evaders of tax. However, in the 1980’s the service sector took off and represented a higher and growing proportion of GDP in many countries. Small businesses accounted for much of this growth, creating employment and efficiently utilizing capital in the process.

  7. The taxation of a sector accounting for such a significant percentage of GDP (average 41%) cannot be ignored. However, the task is particularly difficult in developing economies in that the Micro and Small Business are not generally compliant (through ignorance as well as intent) nor are they easily located by the tax administration. Most operate within the informal sector.

  8. The conclusions discussed in this presentation are based on; • compliance studies and perception surveys undertaken in Kenya and elsewhere • small business complaints about the tax administration burden of taxation in Kenya.

  9. COMPLIANCE PYRAMIDFour levels of taxpayer compliance attitudes can be distinguished: Have decided not to comply Don’t want to comply, but will if we pay attention Try to but don’t always succeed Our Strategies should aim Willing to do to create pressure down the right thing.

  10. Strategy Every country will have all the above in varying degrees. For supporters and triers, the strategy objective should be on facilitation. For the disengaged and resisters, a broader set of measures is required comprising; • Strengthening of tax enforcement capacity, • Developing programs to change their overall attitude towards government.

  11. CONCLUSIONS 1. SMEs are a significant part of the economies of most developing African nations. They are also arguably, the most rapidly growing business segment. 2. Their characteristics and tax compliance behaviour vary considerably. 3. Micro and small business operates predominantly in the informal sector. They are more likely to engage in tax evasion practices and either operate completely outside the tax net or hide a part of their business transactions.

  12. 4. While the cumbersome tax system in most countries, both on the policy and administration side, is considered as one of the main reasons for operating in the informal economy, it is not the only reason. • Proving incentives for familiarization is also important. Improvement in service delivery for the majority of citizens is therefore a necessary condition to improve tax compliance. • Tax policy and tax administrative reforms must therefore be accompanied by improvements in public expenditure management and service delivery.

  13. 5. Tax compliance behaviour is influenced by many factors. The introduction of a specific simple tax regime for micro and small businesses does not always result in improved compliance. These regimes sometimes become stagnation pools often beneficial to small business for all the wrong reasons. However it is a worth investment in the tax reform agenda.

  14. THE END

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