Tackling Challenges of the Shadow Economy in Kenya

BLOG 17/12/2019

Tackling Challenges of the Shadow Economy in Kenya

Money from employment is never enough, and as such, many of us Kenyans complement this with informal side ventures to make ends meet - the side hustle. So, do you ever pay taxes for your side hustle? Or, how about that purchase that you just made in cash and didn’t receive an ETR receipt for, do you think the seller is going to remit the taxes due?

This brings to fore the complex problem of the shadow economy, where taxes are not paid and regulations not strictly followed for cash transactions. On average, a third (1/3) of the world economy is in the shadows, with the highest incidence being in Sub-Saharan Africa, where the weighted average size of the shadow economy (as a percentage of GDP) is 37.6%.

In Kenya, cash payment remains king despite digital money growth within the country. A report by Financial Sector Deepening (FSD) shows that 96% of businesses in Kenya receive their payments in cash. This could be alluded to two things: One, the fact that 95% of the country’s businesses and entrepreneurs operate within the informal sector and only 34.4% of them owning a bank account to run the business. The result, only 19% of registered trade is transacted digitally. Second, the preference for cash transactions with no receipts as a way of increasing profit margins through tax evasion and competitive edge over formal sector, supported by low detection rates of such violations.

In Kenya for instance, the number of registered taxpayers is about 4 million against an estimated working age population of over 31 million Kenyans. This implies that there is a heavy tax burden placed on a very small fraction of the population, mostly in the formal sector, to run the country. The spiral effect however is that, Kenya fails to realize its tax revenue targets, leading to increased taxation rates. This further burdens the already lean taxpayers and encourages SMEs in the formal sector to join the shadows and increases the cost of life for all.

The Commonwealth Association of Tax Administrators (CATA) recently hosted their 40th Annual Technical Conference in Malaysia from 10th – 14th November, 2019 themed “Addressing the Shadow Economy and Digitalisation in Securing Revenue for Sustainable Development” in which the Kenya Revenue Authority (KRA) participated. The Conference provided a platform for member tax administrators to forge new ties and strengthen existing relationships through collaborations, discussions as well as exchange of information and research findings around the shadow economy subject.

Speaking at the conference, Kenya’s Commissioner for Domestic Taxes, Mrs. Elizabeth Meyo, expressed confidence in measures already put in place to address this challenge. Demonetization of the Kenyan currency as one of the most recent strategies has realized measured success in mopping ‘dirty’ money from the economy. Other approaches include; provision of tax amnesty on foreign income and assets, synchronization of government services by a common identifier (Huduma Number); and establishment of inclusive mechanisms to apportion government tenders to special interest groups – especially youth and women.  These strategies have bolstered the chances for compliance and traceable transactions to enhance revenue collection.

Kenya has also prioritized system integrations to track taxable transactions, and is putting in place an incentive regime to formalize the informal sector.  Enforcement of tax compliance requirements for government tenders, simplification of tax regimes and procedures, collaboration with county governments for tax law enforcement and incentivizing taxpayer through awards and recognition are the other effective approaches Kenya is implementing to enhance tax compliance and neutralize the shadow economy.

Additional research will help in unpacking this subject. However, if the resolutions of the 40th CATA Annual Technical Conference are anything to go by, countries still hold the keys to unlocking this challenge as they need to customize solutions to their contexts. A big takeout was the need to prioritize tax administration simplification agenda. Mobile applications for instance will revolutionize tax payments and should prioritize and as a result Kenya is keen not to be left behind in this.

 

By: Loice Akello 

International Relations & Diplomacy, Kenya Revenue Authority (KRA)

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