International experience has proved that taxation of the
Small and Micro Enterprises is a challenge to all tax administrations world
wide. The case is more challenging in the developing countries which indeed
host the lion’s share of SMEs .
From available global
statistics, the revenue yield from the sector is minimal, compliance is made
difficult due to the cash based nature of the sector and further by virtue of
having a very large number of players the probability of an enterprise being
audited is remote. Compliance cost in the sector is thus high both for industry
players and tax administrations.
The traditional
approach to taxing the sector is to use a presumptive tax system. This strategy
has however failed to yield expected results in most cases. This therefore
calls for new initiatives to raise the revenue yield for the sector, a factor
which was alluded to in the recent report by the Parliamentary Budget Office.
The principle objective of the initiatives is to unlock the vast revenue
potential in the informal sector.
In addressing the
issue of taxation of the informal sector, the government introduced Turn Over
Tax in 2009. This was aimed at drawing the informal sector into the tax net by
simplifying tax procedures, record keeping and tax computation for small and
micro enterprises, thus making it easy for them to file tax returns and reduce
compliance cost.
Further, a deliberate effort was made to reduce the number
of taxpayers in the designated VAT regime, which is more demanding and complex,
by raising VAT threshold from three million to five million and subject them to
turnover regime at three per cent of gross sales.
Since its
introduction, Turnover Tax has experienced mixed fortunes. Whereas there has
been considerable increase in the number of taxpayers recruited, there has been
no corresponding increase in its share of revenue contribution.
Several strategies have been put in place to address this
shortcoming including enhancing enforcement effort to detect and deter
non-compliance, educating Small and Micro Enterprises, further simplification
of registration requirements for TOT, expanding scope for mobile phone based
tax transaction, building sector specific capacity through the establishment of
the Medium Tax Office and establishing linkages and partnerships with
stakeholder organisations and financial institutions.
In spite of all these
efforts, revenue growth in the TOT regime is yet to compare favourably with
growth in registration, This brings to focus the general low level of compliance
in the sector.
The way forward for ensuring that TOT performs to
expectation is continuous review and enrichment of strategies with the aim of
ensuring capacity building in audit and inspectorate services, leveraging on
emerging technology to provide a one-stop-shop for tapping vast revenue
potential in the sector, participative setting of realistic targets and
aggressive education of the sector on its tax obligations.
We are pleased with public enthusiasm to register for TOT
but as expected, we are concerned about the revenue yield. We will work with
industry players to reverse the latter.
