Tax on SME remains a Global Dilemma

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.