In many countries today, Kenya included, small and medium-sized enterprises (SMEs) represent more than 85 per cent of all companies. They account for a large proportion of total employment and contribute significantly to national economic growth. They are strongly heterogeneous cutting across and within industries and sectors and in their way of innovation, especially their profitability and growth potential.
SMEs are important for their contribution to employment, economic growth, innovation and the diversity and competition that they bring to our local markets. As a large and important part of all national economies, SMEs often face challenges to their viability and growth, some of which are created by market failures, capital market imperfections and compliance costs.
The subject of taxation of SMEs is an important one both at national as well as international levels. Taxation of SMEs has increasingly gained enormous proportion of attention as a tax broadening measure than just as a mere tax collection exercise. After collection of information over a period of time, the government has become aware that the informal sector in Kenya is a major employer, controls a substantial business population and has within its ranks an enormous amount of capital.
Tax payment is a civic duty and an imposed contribution by the government to contribute to her principle source of revenue to provide public goods and services to its citizens. It is a compulsory unrequited payment to the government. In an effort to maximize collection of revenue, the government introduced turnover tax through the Finance Act of 2007 aimed at bringing more SMEs to the tax bracket.
In addition to the direct cost of taxes, the tax system also imposes a burden on all taxpayers, including SMEs, in terms of the costs of complying with tax laws. These form part of the broader regulatory compliance costs faced by SMEs, which also encompass compliance with other regulations for example labour, environmental or safety regulations.
Tax compliance costs typically have a significant fixed cost component, tending to impose a relatively higher burden on SMEs than on larger enterprises which can benefit from returns to scale in complying. Tax compliance costs may affect a number of economic margins faced by the owners and operators of SMEs, notably, whether to become self-employed, whether to employ others and whether to operate in the formal economy.
A number of factors influence tax compliance costs. These include number of taxes that must be complied with, the rate of changes of these tax laws, the complexity of the tax system, the existence of different tax administrations, multiple deadlines for tax payments throughout the year, cost of external tax service providers as well as internal staff or owner time spent complying.
SMEs are subject to a number of taxes not filed or paid by an employee, notably obligations related to VAT contributions. Simplification measures can assist SME taxpayers to more easily meet their legal obligations under the tax system. Central to these measures will be the ability of the tax administration to facilitate compliance by delivering efficient procedures, good services, adequate guidance and taxpayer education. Tax policies and tax administration service delivery with streamlined regulatory arrangements and tax policy simplification measures is essential in addressing the compliance burden faced by SMEs.
As we take time to appreciate the significance of tax in the SME sector, there are a number of key factors that small businesses can begin to appreciate and consider. These are;
Perception towards Tax
It always begins in the mind and the perception that SMEs have towards ensuring they are tax compliant. We still have a huge negative perception against ensuring that we are tax compliant. For instance many SMEs see the government like a disciplinarian with a huge stick looking for people who have not submitted their dues. However, we should appreciate efforts made by Kenya Revenue Authority and the government to create an environment where SMEs can enjoy various tax breaks essential to their growth. Therefore, once we begin to see the need for paying tax as an obligation then businesses will be in a position of demanding for any requests that will enable them to achieve growth.
Understand the environment you Operate in
Business ought to understand the environment in which they operate and constantly remain updated on any changes and government policies that will directly or indirectly impact their business. For instance, there are products that have now been zero-rated and there are frequent tax windows on certain products and services. A business owner ought to understand the impact of such benefits and take advantage of them.
Focus on Growth
Pay attention to your business and keep looking for ways to grow your business to new levels. As a business community there are forums today that businesses can come together for a common course. These forums have yielded positive results on policy changes. Therefore, businesses need to focus on internal growth and at the same time come together where they can champion for specific courses including any that touch on tax compliance.
There are different views and opinions as to the impact that tax rates have on small businesses, with some entrepreneurs maintaining that tax matters are not pressing concerns for those deciding whether to start a business or hire new employees. Running a business is all about making calculated risks. As an entrepreneur, always remain informed and focus on how to grow your business and what taxes you ought to concentrate on.
The writer is the Chief Executive Officer of Gateway Success Consultancy Ltd.
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