




































AMERICAN INTERNATIONAL JOURNAL OF SOCIAL SCIENCE RESEARCH 12(1) (2022), 30-38 

 

30 

 

SOCIAL SCIENCE RESEARCH 

AIJSSR VOL 12 NO 1 (2022) P-ISSN 2576-103X   E-ISSN 2576-1048 
 

Available online at https://www.cribfb.com 
Journal homepage: https://www.cribfb.com/journal/index.php/aijssr 

Published by CRIBFB, USA 

WHAT KENYA’S TAX POLICY MEANS FOR SMEs BUSINESSES? 

          
  Victor Otieno   (a)1   

 

(a) Managing Director, Viffa Consult Limited, Kilimani, Nairobi, Kenya; E-mail: golavick@gmail.com  

 

 
A R T I C L E I N F O 

      
 

 

Article History: 
 

Received: 14thJune 2022  

Accepted: 13th August 2022 

Online Publication: 15th August 2022 

 
Keywords: 

 
     Taxation, SME Development  

     Compliance, Formalization 

 
      JEL Classification Codes:  

 
      H25, H32 

       

 
A B S T R A C T 

 
This study seeks to review Kenya's first National Tax Policy to examine whether it addresses issues that 

would galvanize the SME sector into formalization and tax compliance, as well as promote the growth 

and development of the sector. Research for the paper involved a desktop study of existing taxation 

legislation, expert reports, as well as SME sector strategic plans and reports published by government 

agencies. The focus of the study is the impact of taxation on small businesses in Kenya along four thematic 

areas that are central to the SME development agenda: (1) rebuilding the economy; (2) expansion to 
hard-to-tax sectors; (3) inclusion of innovative and other emerging sectors; and (4) driving up 

compliance. Study results show that while the Policy captures key issues inhibiting taxation of SMEs, it is 

not explicit in proffering actionable information that business owners can use to inform voluntary 

compliance options. The study also found that small businesses are reeling from economic hardships and 

require concessions to surmount their challenges. The research findings suggest that there is scanty 

information on SME businesses, and the government is looking into leveraging County-based licensing 

activities to collect primary data useful for the development of taxation policies. 
 

 

© 2022 by the authors. Licensee CRIBFB, USA. This article is an open access article  distributed 
under the terms and conditions of the Creative Commons Attribution (CC BY) license  

(http://creativecommons.org/licenses/by/4.0/).  

 

INTRODUCTION 

SMEs in Kenya have long exhibited low regard for formal operations and compliance with regulations. The informal nature 

of operations is particularly rife among micro-enterprises. A report by the Kenya National Bureau of Statistics (2016) states 

that only 21% of the estimated 7.41 million SMEs are formally registered. The same report indicates that small businesses 

employ over 15 million Kenyans, yet, the Kenya Revenue Authority has a record of 6.1 million taxpayers – who comprise 

enterprises of all sizes and individuals (KRA, 2022). 

Various reports attribute the low appetite for formal operations among SMEs to the poor articulation of benefits 

they would accrue. Instead, small businesses associate formalization and compliance with regulations with lengthy, complex 

and bureaucratic processes underpinned by incidences of corruption. Entrepreneurs view government and regulatory 

authorities at the national and county levels as business inhibitors instead of business enablers.  

The lack of awareness about how their business can benefit from formalization has led many SMEs to continue 

operating informally. There are several business opportunities, especially in public procurement that small businesses prefer 

to forego than pursue registration and other business formalization procedures. The poor articulation of benefits also explains 

why SMEs do not file tax returns regularly. 

The draft Kenya National Tax Policy 2022 is the first taxation policy document to be published by the Government 

of Kenya. Hitherto, the Budget Policy Statement (BPS) was the sole document that communicated government plans 

regarding strategic priorities and policy goals, including taxation policy. BPS is published annually by the National Treasury 

as the guide for national and county governments in preparing their budgets for the financial year and over the medium term 

(The National Assembly of Kenya, 2017). The Public Finance Management Act of 2012 anchors the Budget Policy 

Statement as the main instrument for ensuring public participation in the budgeting process.  

The Draft Kenya National Tax Policy 2022 aims to steer a comprehensive overhaul of the Kenya tax system by 

introducing new taxes, increasing tax compliance and improving revenue collection. The primary objective behind this 

exercise is to ensure sustainable growth to achieve Kenya Vision 2030 (the country's economic development blueprint), 

which seeks to transform Kenya into a middle-income nation by 2030 (Government of Kenya, 2022). 

The extent to which small businesses have participated in the development of the Budget Policy Statements is not 

                                                      
1Corresponding author: ORCID ID: 0000-0003-2763-4014 

© 2022 by the authors. Hosting by CRIBFB. Peer review under responsibility of CRIBFB, USA.  

https://doi.org/10.46281/aijssr.v12i1.1783 
 

To cite this article: Otieno, V. (2022). WHAT KENYA’S TAX POLICY MEANS FOR SMEs BUSINESSES?. American International Journal of Social 

Science Research, 12(1), 30-38. https://doi.org/10.46281/aijssr.v12i1.1783 

http://creativecommons.org/licenses/by/4.0/)
https://doi.org/10.46281/aijssr.v12i1.1783
https://orcid.org/0000-0003-2763-4014


Otieno, American International Journal of Social Science Research 12(1) (2022), 30-38 

  

31 
 

readily known. What is clear, though, is that small businesses are still not motivated to formalize their operations. One 

reason for this reluctance may be the fear of opaque taxation (KRA, 2022). This study seeks to review Kenya's draft National 

Tax Policy 2022 to examine whether it addresses issues that would galvanize the SME sector into formalization and tax 

compliance. We also determine whether the Tax Policy establishes a forum for monitoring and evaluating government 

engagement systems and procedures. 

 

Kenya Budget Process 

The promulgation of the 2010 Constitution ushered in significant changes to the formulation of the National Budget. The 

new constitution set aside the exclusivity of the Executive in the development of revenue generation and expenditure plans. 

Departments and agencies that bore direct responsibility over the economy determined the final plans. Entrepreneurs and 

the public had to wait for the annual Budget Speech to know whether their taxes and commodity prices would go up or 

down. The constitution now mandates the Executive to follow a consultative process involving sector stakeholders and 

public participation. 

According to the National Assembly of Kenya (2017), there are four major stages of the budget process in Kenya: 

formulating a proposal, approving it, implementing it and auditing/evaluating its implementation. 

The formulation of the budget is the responsibility of the Executive at the National and County levels. All the 

ministries responsible for finance generate policies that direct the economies and finances of their areas of jurisdiction. The 

National Treasury creates a proposed Budget Policy Statement; the county governments generate County Fiscal Strategy 

Papers. These proposals are presented to the public to give them a chance to voice their opinions. 

After the formulation procedures are complete, the budget moves on to the Legislative arm of the Government for 

approval. Parliament handles this at a national level; County Assemblies take care of it at a county level. The approval stage 

involves the adoption of the Budget Policy Statement and County Fiscal Strategy Papers; approval of budget estimates; and 

enactment of the Appropriation Bill—as well as any other Bills required to carry out budgetary proposals. 

The implementation stage involves carrying out the budget proposals passed at the approval stage. The Executive 

at both national and county levels is responsible for implementing budgets. Parliament monitors the finances of both 

National and County governments every three months by examining documents related to revenues and expenditures. The 

Controller of Budget’s quarterly budget implementation report, and the national and county governments' quarterly budget 

implementation reports are the key implementation and oversight documents.  

The annual budget cycle ends with audit and evaluation. The Office of the Auditor-General is in charge of audits, 

while The Office of the Controller of Budget handles evaluation. The Auditor-General reports on the financial accounts of 

the National and County governments.  The Controller of Budget reviews previous fiscal year expenditure by the National 

and County governments. Both reports are tabled in Parliament for review and adoption. 

 

The Importance of SMEs to Kenya’s Economy 

Approximately 7 million small and medium-sized businesses operate in Kenya today. All industries, including trade, 

manufacturing, agriculture, tourism and financial services, are represented by these businesses (KNBS, 2022). They play an 

essential role in the last-mile delivery of goods to consumers and are responsible for up to 90% of private sector enterprises 

across various sectors. Most are in retail/wholesale trade, manufacturing and catering value chains (KNBS, 2016). 

Small business is a key component of the economy in Kenya. The country’s small businesses employ more than 

15 million Kenyans, while they make up 29% of the GDP (KNBS, 2016). SMEs have played an important role in 

technological innovation in Africa, including mobile telephony technology. 76% of Kenya’s population is under age 35, 

well-informed and exposed to technology; this segment grew up during a period when mobile phones became widely used 

across the continent. It is not uncommon for small businesses in Africa to use mobile technology for financial transactions 

such as payment processing or banking transactions. 

The importance of SMEs to Kenya’s economy cannot be overstated. SMEs are critical to economic growth because 

they provide jobs for many Kenyans, boost exports and create new opportunities for the consumption of goods and services. 

They also contribute significantly to government revenues through taxes on sales and profits. In addition, they can play an 

important role as catalysts for innovation (KNBS, 2016). 

  Retailers who operate small businesses (SMEs) have been credited with helping to sustain the industry value chain 

in several ways. For example, SMEs provide last-mile delivery services for food and beverage manufacturers, telecom 

companies and banks that provide financial services to consumers. Banks have begun using their established distribution 

networks to deliver "agency banking" concepts. The 2021 FinAccess Household Survey shows that retailers extend some 

of these goods and services to consumers on a credit basis. The said survey records that informal sources are the third most 

used source of consumer loans after mobile loans and banks. Within these informal sources of loans is cash or goods/services 

extended by shopkeepers as an extension of their businesses for additional income (Central Bank of Kenya et al., 2021). 

According to various reports, SMEs can double their contribution to the economy if they are granted the support 

they need. The support SMEs need aligns with the key challenges that they face—access to business development support, 

access to capital, access to markets, and access to knowledge resources. To address challenges faced by SME businesses, 

the government published three policy documents aimed at strengthening the SME Sector: (1) The Micro and Small 

Enterprises Act (2012), which defines SMEs and statutory bodies responsible for their development; (2) Kenya Vision 2030, 

which outlines opportunities for MSEs in the country’s development blueprint; and (3) The Kenya Micro and Small 

Enterprises Policy (2020), which outlines the national support structure and interventions for SMEs.  

This study examines the extent to which the draft Kenya National Tax Policy (2022) encapsulates ideas proffered 

by the mentioned documents. We examine the contribution the Tax Policy is poised to make in the development of the SME 



Otieno, American International Journal of Social Science Research 12(1) (2022), 30-38 

  

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sector. 

 

SMEs and Taxation 

The International Labour Organization (ILO) argues that the way businesses are taxed affects entrepreneurs’ decision to 

start or close a business, whether to incorporate or not and the growth prospects of a business. ILO further asserts that it is 

not just the tax rate that is of importance but also how tax administration is conducted. Understanding tax legislation and 

how it impacts business are key determinants of the extent to which an entrepreneur will declare business income (Marchese, 

n.d.).   

Entrepreneurs in Kenya find the cost of regulatory compliance to be high. The high costs stem from the requirement 

to procure multiple licenses throughout a calendar year, levies charged by county governments (depending on activities 

carried out by a business), and the need to hire subject-matter experts for purposes of filing statutory business reports – 

including tax returns. An estimated 7 million SMEs have engaged 15 million people - indicating about two employees per 

business (KNBS, 2016). A typical SME would hire people whose role gravitates to customer support or sales completion. 

Filing tax returns often requires an SME to employ accounting staff either permanently or temporarily. Goods retailers find 

the extra hire requirement high in comparison to margins made from sales of goods. 

Another area of concern for businesses is a demonstration of value for the taxes and levies charged by national and 

county governments. First, the cost basis is unknown. Secondly, they are not predictable as the rates could be changed 

annually (during the national and county budgeting process) or at any time through special government notices. The 

aggregate costs of licenses, levies and taxes may end up being out of reach of micro-enterprises.  

The Kenya Revenue Authority reported that there are 6.1 million registered taxpayers (KRA, 2021). This is a small 

number compared to the 17.4 million employed persons (Statista, 2022), and over 7 million small businesses (KNBS, 2016). 

Tax administration in Kenya relies on the formalization of employment and business activities. It starts with the registration 

of the taxpayer – be it as a corporate or an individual. In Kenya, the registration of taxpayers is often tied to formal 

employment and the registration of businesses. Employers are expected to deduct and remit income tax (Pay as You Earn) 

on behalf of their staff. As for businesses, those whose monthly turnover exceeds KES 80,000/- (USD 677.19) are required 

to register to comply with Turnover Tax requirements (KRA, n.d.).  

The informal sector constitutes an important part of the Kenyan economy, being related to employment creation, 

production, and income generation. A review of the government policies informing the development of local enterprises 

shows a clear intention to support the development of micro-enterprises by, among other things, transitioning the majority 

to the formal sector. Our study of the Draft Kenya National Tax Policy looks into opportunities for formalization of small 

businesses through enabling tax policies.  

 

Study Themes 

The strategic intent of the Draft Kenya National Tax Policy (2022) is to promote an efficient and fair tax system that 

promotes equity in tax administration and a predictable tax environment for businesses. Our review of the Policy focuses 

on four thematic areas: (1) the need to rebuild the economy; (2) expansion to the hard-to-tax sectors; (3) inclusion of 

innovative and other emerging sectors; and (4) driving up compliance. These four are central to the development of SMEs. 

 

LITERATURE REVIEW 

Tax administrators continually face the dilemma of seeking to grow revenue collection through widening the tax net to 

include small businesses, yet the target businesses seem unable to afford tax burdens. Instead, they need tax concessions. A 

report by Barreix and González (2020) aptly captures this paradox by stating that small individual taxpayers and SMEs are 

the highest number of taxpayers in Latin America and the Caribbean, yet they contribute only 0.1% to 3.9% of tax 

collections. The report traces the root cause of the tax collection impasse to the inability of small businesses to transition 

from the informal subsistence economy to more productive and formal participation in the economy. Atawodi and Ojeka 

(2012) argue that this stagnation may be by design as businesses would take deliberate steps to avoid reporting, filing and 

payment requirements that they find burdensome and costly.  

The importance of SMEs to economies around the world is well known. They are instrumental in providing 

employment and driving innovation across various sectors. It is common to find governments setting up state agencies and 

other support structures that focus on policies that facilitate SME promotion, development, and regulation. Micro and Small 

Enterprises Authority, the Ministry of Micro, Small and Medium Enterprises, and SEBRAE are such institutions in Kenya, 

India and Brazil. It is usually the expectation of many governments that the efforts of SME-focused institutions will result 

in the transition of businesses from informal outfits to medium to large-sized enterprises capable of competing effectively 

in domestic and international markets. However, various reports we examined revealed that, on average, SMEs in 

developing markets last only two to three years, mainly due to cash, market and knowledge constraints. 

Governments have looked into mainstreaming SMEs by encouraging formality with the promise of business 

opportunities. In Kenya, for instance, small businesses owned by the youth, women, and persons with disabilities are 

allocated 30% of public procurement opportunities. In addition, there is a 40% allocation of public procurement to locally 

produced goods and services (Government of Kenya, 2016). In the case of India, the government has focused on SMEs in 

fabric and ICT value chains – where the country has a clear competitive advantage in the global market space. Two statutory 

bodies are in place to support the development of MSEs in the fabrics industry - the Khadi and Village Industries 

Commission and the Coir Board. In the ICT space, the government made it possible for eCommerce giants, Facebook and 

Amazon, to engage with local businesses - thereby forging ICT with Trade (Invest India, n.d.). These kinds of affirmative 

action, together with capacity-building programmes delivered through SME-focused state agencies, are designed to mitigate 



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the challenges of cash, market access and business development knowledge that are said to be responsible for low 

productivity among small businesses.  

As small businesses grow and formalize, the progressive action is to include them in the taxation net. The trend 

has been to use preferential tax regimes (PTRs) for small businesses. Machese (n.d.) defines PTRs as special fiscal regimes 

that offer a lower tax rate and simple tax compliance requirements than mainstream tax regimes to a target group. Chen et 

al. (2011) present compensation for limited access to capital financing as the main argument for PTRs targeted at SMEs. 

Other supporting arguments include high costs associated with compliance and depressed cash flow among small businesses. 

OECD (2015) suggest that careful targeting needs to accompany preferential regimes since SMEs are heterogeneous, thus 

the need to address specific sector-based challenges.  

There have been mixed outcomes of applying preferential tax regimes in different markets. Concessions given to 

SMEs are to foster business development. Chen et al. (2011) point out that the risk of preferential treatment is that a business 

could deliberately stop growing to continue enjoying the tax benefits. Where business growth is inevitable, the market could 

witness a continuous break-up of businesses into units small enough to comply with a government’s definition of a “small 

business”. Thus, governments pursue a strategy of having preferential tax measures on a temporal basis to allow for frequent 

review opportunities. Several Eastern Europe and Central Asian countries instituted preferential taxes in the late 1990s to 

early 2000s but then halted the schemes in mid the 2000s to curb abuse by large corporates. All organizations moved to the 

regular tax scheme. What followed was reduced tax reporting and compliance. Reinstatement of concessions saw two-thirds 

of businesses that had migrated to the general tax regime move back to the preferential regime (Engelschalk & Loeprick, 

2015). In a different approach, Japan reduced or abolished tax on specific lines for a year as a short-term measure to boost 

cash flows for SMEs. Chile had a similar programme restricted to three years (Zhang & Shvili, 2020).  

Kenya’s Draft National Tax Policy proposes a presumptive tax approach for SMEs. Marchese (n.d.) explains that 

governments have turnover (sales revenues), capital assets, employment, or utility services consumption as options for proxy 

variables in tax computation – instead of using taxable profits. Kenya currently uses turnover. We are yet to see whether it 

shall be the only variable or if there will be more options.   

 

METHODS AND METERIALS  

This study was a desktop research focusing on the impact of taxation policies in the development of SMEs in Kenya. It 

involved summarizing and collating existing secondary data relevant to taxation policies and their impact to SMEs in a 

number of markets. Reports and strategic plans authored by taxation experts, as well as yearly reports on performance of 

the Kenya Revenue Authority, was evaluated to enrich this study. This helped the researchers generate insight on the 

published Draft Kenya National Tax Policy. 

 

RESULTS 

Small and medium-sized enterprises (SMEs) play an essential role in the world economy, especially in developing countries 

(Zhang & Shvili, 2020). Various policy documents published by the Government of Kenya agree on the importance of the 

SME sector to Kenya’s economy. Our reading of the National Tax Policy shows the intention of the government to broaden 

the tax net to include more SMEs drawn from two business areas: (1) agriculture and informal sectors; and (2) online-based 

businesses. The two segments are characterised as being “hard to tax”. Therefore, the tax administration will require careful 

consideration.  

Agriculture and informal sectors are characterised as being reliant on physical cash (in conducting transactions) 

and maintaining poor records on incomes and expenses (Central Bank of Kenya et al., 2021). Turnover Tax in Kenya is 

payable by businesses that exceed Ksh 1,000,000 (USD 8,435.26) per annum but does not exceed Ksh 50,000,000 (USD 

421,762.97) (KRA, n.d.). Kenya’s Ministry of Industry, Trade and Enterprise Development has classified businesses per, 

among other parameters, their annual turnover (MOITED, 2020). Given the Kenya Revenue Authority’s criteria for 

Turnover Tax, Small and Medium-sized businesses are within the scope of the turnover tax. The Kenya National Bureau of 

Statistics states that all businesses classified as either small or medium-sized are registered and the majority have annual 

turnovers of at least Kshs 600,000 (USD 5,061.16). The majority of medium-sized businesses have turnovers exceeding 

Kshs 12,000,000 (USD 101,223.11) per annum (KNBS, 2016).  

It is noteworthy that, in Kenya, medium-sized enterprises are those with an annual turnover of Kshs 5 million (USD 

42,176.30) to Kshs 800 million (USD 6,748,207.44) (Kenya Agribusiness and Agroindustry Alliance, 2017). This means 

that a medium-sized enterprise will be required to transition from turnover tax to the general corporate tax regime as its 

income grows. Engelschalk and Loeprick, (2015) caution that if a business determines that migration from the presumptive 

regime to the standard regime will mean higher taxes, then such a business will take steps so to remain small and thus 

operate within the lower tax band.  

 

Need to Rebuild the Economy 

Taxes and levies are essential for the development of any country, as they are the primary source of funds that a government 

can use to provide citizen services and infrastructure. Tax policies should therefore focus on increasing tax collection while 

also encouraging high compliance. The effectiveness of a tax policy in this regard can therefore be measured by (1) growth 

in collections; (2) growth in compliance – particularly voluntary compliance; (3) sustainability of the tax base; and (4) 

efficiency in tax administration.  

The draft National Tax Policy recognises that Kenya needs to rebuild its economy and create jobs. The Policy states 

that the government will ensure that tax measures are designed to promote growth, encourage investment and promote 

economic development. The Policy also recognises the need to have specific reviews with the active involvement of 



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stakeholders at least once every five years. This move allows the National Treasury and Kenya Revenue Authority (KRA) 

to engage with taxpayer groups on market dynamics that need to be factored into tax strategies, as well as align taxation 

plans with the Kenya Vision 2030 – the country’s economic development blueprint. 

It is clear from this policy how important it is for government agencies such as KRA and National Treasury to be 

engaged directly with stakeholders to ensure that their views are taken into consideration while designing policies relevant 

to them. The draft Policy also calls for improved monitoring of tax compliance as well as effective enforcement mechanisms 

aimed at ensuring compliance by taxpayers with their obligations under tax laws. 

A scrutiny of the Draft Policy reveals that the immediate plan is to expand the tax net to include agriculture, 

informal and emerging sectors – specifically businesses involved in eCommerce. Though the Policy has not been considered 

and approved by Parliament, the Kenya Revenue Authority has already captured its intent to focus on these sectors in its 

strategic plan (KRA, 2021). Presumptive tax is among the measures proposed to bring the agriculture and informal sectors 

into the fold. The digital sector is levied a 1.5% tax on income from services accrued or derived in Kenya through a digital 

marketplace and the Policy proposes an increase in tax yields from the sector.  

Although businesses have yet to fully recover from the effects of the COVID-19 pandemic, the World Bank asserts 

that Kenya’s economy is recovering faster than originally predicted. In 2021, real GDP increased by 7.5%, higher than the 

estimated growth in Sub-Saharan Africa of 4%. (Mathenge et al., 2022). Costs of doing business have shot up mainly as a 

result of higher international oil prices as per a report by Mathenge et al (2022). It is our considered view that businesses, 

at this time, need to access cash to aid their recovery. Chile, for example, reduced the corporate income tax rate from 25% 

to 12.5% for SMEs for the fiscal years 2020, 2021 and 2022 (Zhang & Shvili, 2020). The Policy has not proffered any 

concessions to free up cash for SMEs. Tax concessions can help small businesses to retain a higher proportion of their 

earnings, enabling them to obtain external finance (Marchese, n.d.).  

 

Expanding to Hard-to-Tax Sectors 

The Draft National Tax Policy aims to expand the tax base in both the agriculture and informal sectors. Currently, there are 

tax regimes covering these sectors, but revenue collection and administration are challenging on account of their informality. 

The majority of farmers are smallholders; small-scale operations account for over 70% of agricultural production and meet 

about 75% of the national food demand (Njenga, 2016). In Sub-Saharan Africa, presumptive tax regimes have mostly been 

used to collect some tax revenues from large domestic informal sectors (Marchese, n.d.). There is a need to examine how 

these regimes could be more effectively used as instruments for formalizing SME operations in the informal sector. 

The informal sector is characterised as being heterogeneous, which makes it difficult to apply a blanket taxation 

regime without creating an imbalance in the costs or burden of compliance for smallholder farmers and informal traders. 

(Atawodi & Ojeka, 2012). Tax compliance costs for small businesses are higher than for large businesses. This is because 

a larger company's tax compliance costs are proportionally less expensive when compared to a smaller company's tax 

compliance costs. The reason for this is that while total tax compliance costs are higher for larger companies in absolute 

terms, they are more burdensome when measured against sales and income (OECD, 2015).  

Engelschalk and Loeprick (2015) argue that the risk of factual discrimination against low-profit trading businesses 

can be avoided by introducing a rate differentiation in the turnover tax regime. By reducing their tax burden, small businesses 

in the trade segment will be able to increase their profits and grow their business. However, data on the performance of 

small businesses are currently not up to date. The last comprehensive study on the SME sector was conducted by the Kenya 

National Bureau of Statistics back in 2016; this should be an annual exercise given the importance of the sector to the 

economy. The Kenya Revenue Authority can leverage provisions made in its tax policy for consultative forums to engage 

with MSE Associations and other interested parties to begin generating data that can be used to justify the scope and level 

of rate differentiations. 

 

Innovative and Other Emerging Sectors 

The Kenya Economic Survey published by KNBS (2022) records the growth of online businesses and digital connectivity 

on account of markets seeking alternative means of accessing goods and services at the height of the COVID-19 pandemic. 

The Government of Kenya imposed movement and physical interaction restrictions, otherwise known as lockdowns, which 

impacted trade routines among retail businesses and consumers. This presented an opportunity for technology firms to 

deliver innovative online solutions to businesses. The KNBS (2022) report states that as a result, the value of output from 

the ICT sector grew by 15% from KSh 494.3 billion (USD 4.17 billion) in 2018 (before COVID-19) to KSh 566.3 billion 

(USD 4.78 billion) in 2021. The number of Internet Service Providers grew by 64% over the same period. The value of 

mobile commerce transactions grew by 63.2% to reach KSh 15.3 trillion (USD 0.13 trillion) between 2020 and 2021 only. 

The Kenya Revenue Authority (2021) interpreted the value of output from the ICT sector as a clear sign of the 

migration of businesses to the digital economy. It is noteworthy that the Digital Service Tax came into force in 2021 and 

KRA now planned to increase compliance with VAT and Income Tax. However, Kumar (2021) argues that while there was 

a surge in digital marketplaces, many businesses went online as a stopgap measure to mitigate the impact of lockdowns and 

other restrictions placed on businesses. He notes that eCommerce was new to many businesses, and they now also had to 

contend with complex taxation, data privacy and other nuances unique to online trading. In addition, not all online 

marketplaces operated from other countries and thus local businesses were more exposed to international competition. 

(Atawodi & Ojeka, 2012). 

At the time of coming into effect on 1st January 2021, Digital Services Tax was at 1.5% of the income accrued or 

derived in Kenya. A report from Njanja (2022) indicates that Kenya plans to double the rate to 3% beginning July 2022 as 

a means of increasing domestic revenues and narrowing fiscal deficit. Retail trade margins for fast-moving consumer goods 



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are very thin, with some reports indicating margins of 6%. Thus, a tax of 3% will erode progress made in eCommerce 

innovation as the tax would stifle working capital for small businesses (Kumar, 2021). In contrast, the taxation policies in 

Singapore have encouraged the establishment of technology businesses in the country. The country's tax code gives certain 

concessions to companies that are resident in Singapore that acquire intangible assets and as a result, Singapore is a global 

IP hub and leading knowledge-based economy (Deloitte, 2021). 

 

Driving Up Compliance 

It is estimated that 30 million persons in Kenya are aged above 18 years. Slightly more than half of this population is 

employed (Statista, 2022). KRA reports that there are 6.1 million active taxpayers in their records (KRA, 2021). Considering 

that the taxpayers include registered businesses, we can safely deduce that KRA has netted less than 35% of the employed 

base. KRA plans to immediately enlist an additional 2 million taxpayers from the informal sector, and digital sector and 

strengthen tax administration.  

In terms of compliance, KRA’s strategic plan states that filing of returns is at 68% of taxpayers and payments of 

taxes are at 88% of taxpayers (KRA, 2021). Traditionally, KRA has used sanctions and penalties to enforce compliance. 

The Draft National Tax Policy proposes an enhancement of the same measures. Al-Ttaffi et al. (2021) argue in favour of 

using tax incentives to encourage voluntary compliance, whereas Marchese (n.d.) advocates for a system of preferential tax 

rates, which would simplify tax administration, broaden the tax base and thus raise additional revenues.  

Brazil uses the Single Replacement Tax approach to aggregate what would be several lines of taxes and levies into 

one tax. Social security payments are incorporated into the single tax, known as Simples Nacional (Pesssa et al., 2015). The 

Single Replacement Tax is calculated against gross revenue and the rate encompasses a component of the replaced taxes. 

Progressive rates apply based on the level of income. The most important element of the Brazilian model is the systematic 

engagement between tax administrators and SEBRAE (the Brazilian Support Service for Micro and Small Businesses) 

(Pesssa et al., 2015). This enables the government to drive compliance while articulating the benefits of compliance to small 

businesses 

According to research from the Organization for Economic Co-operation and Development, developing countries 

face difficulties in collecting taxes because of a lack of coordination between business operations and tax obligations. SMEs 

use separate systems for their business operations and tax obligations (OECD, 2022). The businesses use operating systems 

to obtain goods and services from other businesses within their value chains (like suppliers), connect to their financial 

service providers (internet/mobile banking) and service customer needs (eCommerce or sales tills). The Kenya Revenue 

Authority has provided an online portal (iTax platform) for filing taxation information. The challenge is that output data 

from business operation systems may not align with the input data required to fulfil tax filing obligations. The businesses 

often have to incur additional tax compliance costs by hiring persons to complete filing requirements. 

 

DISCUSSION 

The cost of compliance with government regulations is high and of little value for SMEs. Businesses must apply for multiple 

licenses throughout the year, on top of complying with complicated tax regulations. Additionally, many businesses prefer 

to remain informal as the registration requirements and procedures are not readily understood. To achieve full compliance 

with business licensing and reporting requirements, SMEs need to engage with National Government agencies as well as 

County Government agencies. Procedures and timelines at these levels are largely invisible to small businesses. Our study 

finds that SMEs perceive that government rules and regulations do not foster business growth. Instead, they exist for 

government revenues without any residual value to entrepreneurs. 

Tax compliance is notoriously low among small businesses, but the National Tax Policy was expected to act as a 

“sales pitch” for tax compliance. Al-Ttaffi et al. (2021) found that tax penalties have no significant impact on curbing tax 

noncompliance among SMEs, although the government's use of reliable data on profitability would be helpful. Engelschalk 

and Loeprick (2015) point out that small businesses with low-profit margins find turnover tax rates unattractive because 

they are usually arrived at by the government without using reliable data on the profitability of SMEs. However, there is an 

opportunity for tax policy framers to engage with the SME sector to drive formalization and compliance while apportioning 

incentives where applicable.  

  The Draft National Tax Policy provides for a comprehensive review of tax laws every five years. One of the 

priorities in the current period would have been providing incentives under the Digital Services Tax (DST) if organizations 

assist small- and medium-sized enterprises to organize their business records. It is this study’s view that the priority at this 

stage should be on the registration of new taxpayers without the burden of immediate tax compliance. This can be achieved 

quicker for SMEs that are looking to expand their markets through online infrastructure or use digital business systems, 

where business transaction records in these platforms can be designed to fit tax reporting requirements. As it stands today, 

DST is not well understood by many taxpayers and doubling its rate may dissuade patronage of digital platforms and slow 

down government efforts to comply with this new law (Njanja, 2022).  

For small businesses, matters related to taxation can be complicated. In Kenya, for example, tax requirements are 

usually delivered through a legislative process and presented to the public in documents that use technical jargon and 

legalistic language. A typical SME owner may not readily evaluate and interpret the implications of tax laws for his/her 

business. It is noteworthy that a report published by the Kenya National Bureau of Statistics indicates that 60.6% and 90.2% 

of licensed and unlicensed establishment’s owners have secondary level as their highest educational attainment; 71.1% of 

unlicensed business owners have not gone beyond primary school (KNBS, 2016).  

The OECD (2012) recommends that tax administrators focus on the end-to-end process surrounding business 

licensing rather than just the tax compliance processes. Most businesses acquire annual trade licenses from their respective 



Otieno, American International Journal of Social Science Research 12(1) (2022), 30-38 

  

36 
 

counties; the use of presumptive tax at the point of purchasing the license would be an ideal starting point for analysing data 

collected from County licensing processes. Our scan of County licenses shows that there are three categories based on the 

core business (sector and subsector), location (whether rural or urban) and size of the company (employee size or annual 

revenue). Tax policy formulators can leverage this information to formulate future taxation measures.  

Barreix and González (2020) propose that pension and health coverage be included in the remittance of taxes by 

providing benefits to employees and their families, including those who are not members of social security programs. Such 

an approach would present immediate, direct and tangible benefits to small- and medium-sized enterprises. It is noteworthy 

that universal health coverage is part of Kenya’s economic development blueprint (Kenya - Universal Healthcare Coverage, 

2018). There may be benefits associated with bundling NHIF payments with SME tax payments to signal government-

sponsored health care for all taxpayers. National Social Security Fund payments could also be included. 

 

Lessons from Brazil 

To motivate the formalization of SMEs, the Brazilian Government introduced Simples Nacional tax regime, which was well 

received in the market. Simples Nacional covers 65% of Brazilian companies and accounts for one-quarter of federal tax 

exemptions (Pesssa et al., 2015). The tax regime was a part of a wider government scheme aimed at supporting the 

development of SMEs. The reforms included simplifying licensing and access to finance.     

One of the key success factors in tax administration is the close collaboration between the government and SMEs 

through SEBRAE (the Brazilian Support Service for Micro and Small Businesses). SEBRAE is a quasi-governmental 

organization which acts as the main service delivery body in Brazil's SME ecosystem. It has the equal participation of private 

and public entities. Founded in 1972, SEBRAE’s activities are coordinated at a national level via the National Deliberative 

Council and executed through field offices evenly distributed across all 27 Brazilian states. SEBRAE raises the bulk of its 

income from contributions made through the payroll of all member organizations and fees charged for courses offered to 

businesses. The funds raised meet operational overheads, and more importantly, the development of programmes and 

initiatives aimed at creating sustainable growth conditions for small businesses. Its broad membership and wide network of 

service centres make it an influential player capable of driving the SME agenda effectively. SEBRAE’s footprint allows it 

to adapt to unique scenarios that SMEs may bring to the fore from state to state 

The consultative interactions between Government and SEBRAE provide SMEs with legitimacy, organizational 

coherence and influence over economic policy decision-making. In exchange, the government leverages SEBRAE’s network 

and influence to promote deep reach into the business community, reduce bureaucracy in government processes, and provide 

options for adapting policies to fit varied situations. 

 

Lessons from India 

India is recognized for having well-crafted fiscal and monetary policies with an economic growth rate, according to World 

Bank estimates, peaking at 7.5% to 12.5% at one time – before declining to 4% following weaknesses in the financial sector, 

a slowdown in private consumption and impact of COVID-19. The country is a hub for information technology services. 

The India Brand Equity Foundation estimates that the domestic revenue of the IT industry is US$ 45 billion and export 

revenue is US$ 150 billion per annum. The sector contributes 8% of GDP and employs about 4.5 million people. It is 

noteworthy that Kenya looks to India for some key development plans and models. Trade, cottage industries, microfinance 

and cooperative movement models applied in India have contributed to the structures currently in use in Kenya. In addition, 

the concept of the Constituency Development Fund in Kenya was borrowed from a similar scheme that was successfully 

implemented in India. 

The Indian Government has provided several growth opportunities for the SME Sector. There is a framework for 

SMEs to raise capital through stock markets – again a feature that Kenya intends to implement. Government e-Marketplace 

(GeM) and other online marketplaces have been deployed for businesses to market their products. It is noteworthy that 

public sector procurement is conducted via the GeM platform. As of June 25, 2021, GeM portal has served 6.87 million 

orders worth Rs.116,291 crore (US$ 15.67 billion) from 2 million registered sellers and service providers for 52,651 

government buyers. The adoption of digital payments has seen 72% of SME payments done through the digital mode 

compared with 28% of cash transactions. The individual business transaction data generated through digital platforms are 

used to craft taxation policies and sector growth programmes. There is also a drive to formalize businesses through an online 

registration platform that is focused on the registration of SMEs. 

India’s approach has been to focus SMEs on sectors/industries in which the country has a clear competitive 

advantage in the global market space. Indian fabrics, for instance, are renowned across the world. Thus, there are two 

statutory bodies put in place to support the development of SMEs in the fabrics industry - the Khadi and Village Industries 

Commission (KVIC) and the Coir Board. India is also a key player in the global ICT space - where it has exported labour 

and technology. The Government made it possible for eCommerce giants, Facebook and Amazon, to engage with local 

businesses - thereby forging ICT with Trade (which is another strength of Indian entrepreneurs). 

Another key element in India’s regulatory environment is the consistent review of policies and interventions with 

the input of stakeholders. The underlying objective of the reviews is to ensure that desired government policy outcomes are 

achieved. Review outcomes are made public to keep SME actors accountable and leverage the distribution of reports to 

publicise investment opportunities among entrepreneurs. 

In the wake of the COVID-19 pandemic, several small businesses in India moved online to sell their products. 

According to Kumar (2021), businesses that migrated to eCommerce platforms ended up being disadvantaged by the Goods 

and Services Tax Act. The GST Act allows merchants with less than 1.5 crores in annual revenue to register for a 

Composition Scheme. The tax regime makes life simpler for traders by allowing them to pay a single rate of 1%. However, 



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37 
 

when traders under this scheme sell on an online marketplace, they are subject to the full rate of tax on all transactions. So 

instead of supporting the small businesses through the transition, the taxation policy stifled relief at a time of crisis.   

 

CONCLUSIONS  

Having a national tax policy is a step in the right direction as it will allow taxpayers to plan. The Draft National Tax Policy 

in its current form does not meet the threshold of providing actionable information for business owners. There is minimal 

information on the taxation strategy which bears the risk of creating an uncertain business environment.  

On the positive, the Policy provides for comprehensive reviews of tax laws at least once every five years. This will 

afford stakeholders to engage in market realities as well as align with government priorities. Other economic planning 

instruments such as the Vision 2030 Medium-Term Reports and Economic Survey can then be used to align taxation plans.  

A review of various reports brings out the need to use the current wave of tax policies to set the stage for the future. 

It will be a challenge for the government to achieve a giant leap in compliance ahead of putting forth a strong case for 

voluntary compliance. The focus of the first five-year cycle should be on the registration of taxpayers, compilation of reliable 

data and cushioning businesses from the prevailing economic hardships. Close collaboration with County-based licensing 

activities should be leveraged to collect basic data on businesses – who they are, where they are, what they do and their 

sizes. This information would provide a foundation for developing taxation policies.   

The Policy should take an incentive-driven approach to compliance. Implementation of a Single Replacement Tax 

regime that incorporates all licensing and social payment requirements should be adopted for micro and small enterprises. 

Taxation should not be viewed just as a means of revenue collection by the government. The taxpayer would also want to 

understand the tangible benefits of compliance. Layering delivery of medical cover (NHIF payments) and a pension scheme 

(NSSF payments), however basic, will go a long way in meeting the need for tangible benefits. The aim is to make it easy 

to comply and difficult not to (OECD, 2012). 
 

 

 

Author Contributions: Conceptualization, V.O.; Methodology, V.O.; Software, V.O.; Validation, V.O.; Formal Analysis, V.O.; Investigation, V.O.; 

Resources, V.O.; Data Curation, V.O.; Writing – Original Draft Preparation, V.O.; Writing – Review & Editing, V.O.; Visualization, V.O.; Supervision, 
V.O.; Project Administration, V.O.; Funding Acquisition, V.O. Authors have read and agreed to the published version of the manuscript. 

Institutional Review Board Statement: Ethical review and approval were waived for this study, due to that the research does not deal with vulnerable 
groups or sensitive issues. 

Funding: The authors received no direct funding for this research. 
Acknowledgments:  N/A 

Informed Consent Statement: Informed consent was obtained from all subjects involved in the study. 

Data Availability Statement: The data presented in this study are available on request from the corresponding author. The data are not publicly available 

due to restrictions. 

Conflicts of Interest: The authors declare no conflict of interest.    

 
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