Tax compliance remains a challenge for Kenyan SMEs

Tax compliance remains a significant challenge for small and medium enterprises (SMEs) in Kenya, posing a threat to the government's revenue collection efforts. Victor Otieno, Managing Director at Viffa Consult, shed light on the issue during an interview with CNBC Africa. The Kenyan Tax System has been underperforming for the past decade, falling short of the East African Community's target tax yield of 25%. In the financial year 2020-2021, the tax yield stood at a mere 13.8%, a decline from the 18% recorded in 2013-2014. The country has a working population of around 17 million, with only 6.1 million registered taxpayers, leaving a substantial gap of 11 million individuals, most of whom are SMEs operating in the informal sector. The compliance challenges faced by SMEs stem from cost-benefit issues, a lack of perceived value in tax compliance, the complexity of tax filing procedures, and a general lack of information. These factors make it difficult for SMEs to navigate the tax landscape successfully. The government's approach to tax compliance for SMEs should focus on incentivizing growth rather than solely formalizing them for tax purposes. SMEs need support in the form of a conducive business environment that streamlines regulatory processes, improves market access, and enhances capacity building and financial access. The lack of clear models for SMEs to access markets, both domestically and internationally, hinders their growth potential. Drawing from successful models like Brazil, experts suggest that Kenya should simplify tax processes by introducing a single tax payment that covers various levies like NHIF, NSSF, and taxes. This streamlined approach would enable SMEs to comply with tax obligations more efficiently and engage in cross-border trade effectively. Implementing such strategies is crucial to fostering a tax-compliant culture among Kenyan SMEs and supporting their sustainable growth in the long run.