Minimum alternative tax; are Kenyan SMEs paying the price?

Minimum Alternative Tax (MAT) targets firms carrying out business or which have a physical presence in Kenya has received uproar. Introduced by Finance Act, 2020, the MAT targets SMEs whose annual turnover does not exceed one million, in which by that case, they do not pay Turn Over Tax (ToT). Payable quarterly, the SMEs are expected to submit 1% of the gross sales regarding whether they are making profits or losses. This comes right after the government introduced a “digital service tax” of 1.5% of the gross transaction value of a person whose income provision is derived from or accrues in Kenya through a digital marketplace.

The Kenyan economy is largely driven by SMEs. According to the Economic Survey 2020, about 98% of enterprises are SMEs contributing to about 3% of the country’s GDP. Whilst the sector accounts for the bulk of employment in the country, about 14.9 million, its contribution to tax revenue has continued to be dismal. Going by the disconnect of the sectorial tax contribution and the perceived lucrativity of the sector, there is an obvious challenge that, tax leakages are eminent. It is in that vein that the taxman has decided to slap the sector with mandatory MAT, in the argument that, a business cannot make perpetual losses and remain afloat. 

So ideally, the inefficiency in tax collection has resulted in the whole sector having to pay irrespective of their profit position. Factually, it is punitive to fail to distinguish between accounting and tax losses. As such, it burdens even the tax-compliant firms who might be currently facing downtime. As such, this is a classic case of dipping the whole log in water to soften instead of sharpening the blunt axe. 

We are coming from a tough pandemic time where majority of SMEs have closed and the few remaining, are fighting through their existence. Evidently, the government in partnership with donors’ agencies has aggressively supported SMEs through fiscal stimulus package and capacity building to survive through the pandemic. However, the newly imposed taxes are threatening to reverse the very same gains the government has worked hard to achieve? Most SMEs owners live hand to mouth and loaded with debts. What will be their business case if more bills are loaded to them while they are still struggling through tax-loss positions?

Challenges in hindering the implementation of MAT are quite obvious. Firstly, the inefficiency of tax collection, which has been a glaring problem still remains. With only 1.56 Million SMEs licensed, whereas about 5.85 million are unlicensed, the tax is usually collected from 21% of its targeted tax base. The government should have sharpened its tax collection mechanisms to broaden the existing tax base. Secondly, about 63% of SMEs in Kenya are run by low-skilled with primary school education, there are chances that the “tax documentation” which is pretty sophisticated as of today, will impose a compliance burden on them leading to tax evasion

Whilst, there is a huge potential for domestic resources within the SMEs bracket, introducing MAT will adversely affect the growth of the sector. SMEs, especially for the loss-making enterprises, their mortality rate is expected to increase resulting in unintended economic effects on the Kenyan economy.

The article first appeared on Standard Newspaper Pg 30 on 20/02/21

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