The IMF taxes on Africa’s petty traders of Nyamakima

I was a cab reporter on the City beat when Tuskys was evicted from its 11-year-old iconic BebaBeba outlet in the middle of Nairobi, that up till then had looked as the most ideal location for a retailer, on the bus route to Nairobi middle class surburbs north of the city.

Tuskys at the time had not yet began hurtling towards the retail sector collapse. It was a big stable brand. In 2017, the retail sector troubles were being diagnosed as the legacy mismanagement of state linked Uchumi, where patronage had compromised supply contracting diverting money from real suppliers to related parties and insider shell companies.

Tuskys explained that Bank of Baroda had sold the building and the new owner felt he could get more money splitting the floor space into tinny little compartments paneled up to form small retail shops that had been creeping from Nairobi’s downtown into the center of the capital.

It was the triumph of Nairobi’s growing entrepreneurship, backed by merchandise trade imported from China that absorbed the country’s youthful workforce as public service and manufacturing capacity to generate employment stagnated.

Many did not see the problem as structural, how an aggregator of local manufacturers and fresh agricultural produce could be muscled out by traders of mobile phone covers, shoes and screen protectors.

The stalls just kept coming, taking up all the space on Tom Mboya and Kimathi Street. Today, the city is mostly covered in these innumerable Perspex boxes retailing everything from mobile money exchanges, handset and accessories sales and boutique items like clothes and imported perfumes.

Thousands of highly educated Kenyans leaving universities poured into this sector as it became easier to import goods, coupled with e-commerce and container aggregations. Today 83.7 percent or 16 million of Kenya’s 19.1 million workforce is employed in the informal sector.

Over 94 percent of the country’s 7.4 million micro, small and medium enterprises (MSMEs) have fewer than five employees standing in small stalls rented for just about Kes20,000 in the middle of Nairobi where rental charge averages Kes173,600 per 1,500 square feet for formal players.

Sooner than later, this informal merchant trade became a retail sector problem and what began as an Uchumi issue spread industrywide collapsing and dragging down Nakumatt, Tuskys, Deacons and Choppies . With it went formal sector jobs and their supply chains, wiping out billions of potential tax collections.

The government for a long time was content collecting money from the formal sector where structured companies that maintained payrolls would collect the money for the tax man, keep verifiable record and file returns annually.

It had a pool of two million Kenyans working in the private sector and 937.9 thousand in public sector to collect pay-as-you-earn taxes from, preferring instead to borrow expensive loans to build roads and railways for importers to bring in goods faster into an economy it had little access to tax.

The Kenyan economy grew on paper and concrete slab while its productive manufacturing and agricultural sector either stagnated or declined but creditors cared little about why the economy was growing at an average 5 percent annually while tax collection on this growth has actually been declining to a decade low in 2017 with the tax-to-GDP ratio falling to 16.9 percent.

Billions were advanced to the country on the assumption that Kenya’s economy was growing rapidly and would easily pay back, with commercial creditors relying on indicative GDP growth, credit ratings and marketed roadshows to oversubscribe on Kenya’s very lucrative sovereign issues.

Now if the oversubscription and outpouring of interest on the Kenyan bonds was an endorsement of the sovereign, it could also go that being locked out of very expensive commercial bond markets and subsequent pandering to the demands of the IMF was the surrender of sovereign control over Kenya’s resources and taxes, something closer to debt diplomacy that the West tends to accuse China of.

As Kenya ran out of room to borrow and turned to the World Bank and the International Monetary Fund whose loans come with thorough assessment of the economy and technical assistance to draft tax policies for the government, the focus on these petty traders was about to change.

Read also: When taxes don’t make business sense

Since the IMF landed in town, Kenya has imposed value-added taxes on petroleum products and Liquid Petroleum Gas, increased capital gains tax, imposed excise duty on airtime, sim cards and bank transactions, bank loan fees, scrapped home ownership tax exemptions, increased excise on alcohol and pledged to adjust the duty every year in line with inflation.

Kenya has also committed to increasing charges on and privatizing water, state-owned enterprises and roads, which will be accessed through toll taxes and start deducting civil servants’ pay to fund pensions.

The World Bank in its 16th edition of Kenya Economic Update noted that even though more goods and services have been traded, very little of these economic activities have been taxed even with KRA enhancing compliance.

For the multilateral lenders it did not make sense for the government to rely on the 2.9 million formal workers especially since most of them, 97 percent earned less than Kes100,000 when a whole 16 million active workers were making untaxed cash.

The World Bank and the IMF technical teams have helped advise Treasury into designing schemes to trap these small retailers. First through the introduction of the presumptive tax in Finance Act 2018 applicable to businesses whose gross turnover did not exceed Kes5 million.

The rate for presumptive tax in FY2018/19 was 15 percent of the amount payable for a business permit or trade license issued by a County Government.

The government also introduced a turnover tax on medium and small businesses earning less than Kes1 million but even then it was only yielding Kes2.6 billion annually.

Then Finance Act 2020 introduced a minimum tax of 1 percent on gross turnover. The minimum tax would not be applicable to exempt income, employment income, residential rental income, capital gains, persons undertaking mining or upstream oil and gas activities, persons subject to turnover tax, insurance business, and any business whose retail price is regulated by the government.

To seal loopholes, the government had to sharpen the claws of the Kenya Revenue Authority which, through its multi-agency team, cracked down hard on tax evaders.

The assault on small business set up the then President Uhuru Kenyatta against his own Kikuyu people, who dominate retail sector trade personified by the vibrant trading hub sandwiched between River Road and Kirinyaga Road in Nairobi’s downtown called Nyamakima.

Nyamakima traders angry at President Kenyatta fell right into his Deputy William Ruto who was campaigning on a bottom of the pyramid rhetoric, promising to protect small traders, give them cheap loans and stop harassment from the taxman.

And they bought it hook line and sinker only to discover that it is not the man who sits on the State House a top of the hill that is calling the shots, but the hawk-eyed IMF and World Bank bureaucrats writing the fine print away from public glare.

In March this year under the Hustlers government, Kenya announced the importers of consolidated cargo will now be required to pay taxes based on transaction value, a shift from the practice where KRA charged a flat minimum fee based on volume.

President Ruto’s government has even been more eager to implement the IMF taxes on small traders that the new Finance Bill 2023 has proposed bringing down the threshold for turnover tax from Kes1 million to Kes500,000, targeting Kenya’s smallest businesses making about Kes1,400 a day while scraping Covid-19 relief to charge three percent from the current one percent.

And with Parliament turned into an executive rubber stamp legalising all of the IMF taxes, Kenyans saving grace has been the constitutional protection and its steadfast defenders along the corridors of justice.

Taxpayers argued the minimum tax was unconstitutional given it did not fit the definition of tax and unfair where it wanted small businesses to pay way higher taxes than larger corporates sometimes as much as all the money they made.

On 20 September 2021, the High Court declared the minimum tax to be unconstitutional prompting the eager KRA to appeal against the High Court’s decision. However, on December 2, 2022, the Court of Appeal dismissed the appeal and upheld the decision of the High Court prompting KRA to take its appeal further to the Supreme Court.

“This means that a taxpayer who has no profit or is in a loss making position will have to pay the minimum tax out of pocket or their capital. Essentially, what this means is that the impunged tax cares less of the ability of the taxpayer to pay,” Isinya East Sub County Bar Owners Association said.

They argued that parliament had violated the constitution by purporting to impose a tax outside the recognized taxes. Minimum tax, they said, cannot be classified as value added tax, custom duties, excise tax nor can it be classified as Income tax as per the income tax act, income tax is only imposable on profit or gain and not gross turnover.

But while they were busy fighting in court, in closed door meetings with the IMF, Kenyan authorities were promising to introduce new tax measures to replace the Sh21 billion in annual minimum tax if they lose an appeal against a court ruling that stalled its implementation from January 2021.

“Consideration by the High Court of pending legal challenges to the minimum alternative corporate tax (MACT) is proceeding. We expect the court review to take place in July 2022 and remain confident of a positive result.

“If the outcome of the court process is not as we anticipate, we will implement other tax measures to achieve the Kes8 billion in FY2022/23 that we expect from the reintroduction of the MACT,” the National Treasury told the IMF.

And perhaps to cure its unconstitutionality, as part of the proposed reforms, Kenya committed to alter the definition of taxes to include an alternative and digital tax as part of expanding its revenue base under the quantitative performance criteria.

“Tax revenue of the national government are defined as the sum of personal income tax (PAYE), corporate income tax, import duties, excise duties, value added tax, and other taxes (e.g., alternative minimum tax, digital sales tax),” the IMF Fourth Review reads.

While this measure was not met by the third review and was not rated in the fourth review, it is still unclear the new form this tax would take.

Digital tax on the other end is coming full circle with the inclusion of content creators marketing or retailing products via growing e-commerce as well as targeting the 14 million Kenyans trading in crypto and NFT (non-fungible tokens) with a new digital asset tax that is to be paid within a day the assets are transferred.

Even as the government is convinced small scale traders are tax evaders who need to be squeezed for their last penny, the reality may be very far from the truth. Small scale traders do pay taxes, mostly informally.

“SMEs, begin from loss making positions owing to the plethora of licenses and permits required to commence the business together with the costs antecedent procuring the said licenses and these are the very costs and expenses contemplated under section 15 of the ITA which are recurrent whether or not we make a sale,” Isinya East Sub County Bar Owners Association said.

A trader also told Maudhui House with the tax increases, officials of the Kenya Revenue Authority are devising schemes where they slap taxpayers with huge bills then meet them informally in hotels to negotiate the bill downwards and solicit for bribes. This might explain why KRA has failed to collect Kes1.601 trillion as at June 2021, a fourfold jump in outstanding debt from Kes415 billion three years’ prior at a time Kenya, East Africa’s giant economy, is struggling to raise revenues from new tax measures.

The taxman was at a loss explaining to the National Assembly Public Investments Committee on Commercial Affairs chaired by David Pkosing (MP., Pokot South) which sought answers after audit queries revealed KRA failed to collect taxes on several corporates even after it raised tax claims, conducted audits and issued agency notices.

If the fight in courts fails to stop the government and IMF, small business will always find refuge in evading the taxman.

One thing about outsourcing this multibillion technical assistance is where the rubber meets the road. The higher and more punitive the state raises taxes, the higher the incentives to evade them.

A trader in Nairobi’s central Business District told Maudhui House they usually make several copies of a single business permit shared between shops and cases where a trader uses the same permit on several business locations is also rampant.

“When we register for the permits they are not linked to specific shop number and since we are so many we just print and share. Those who have several shops on the same building also use the same permits,” the trader said.

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