It’s Payback time! How will MSMEs Businesses Handle It?

MSMEs brace for a pocket straining payback for the Ksh3.6 trillion budget. The new tax reforms has just landed on Kenyans and things are just so hard. Increase in prices of basic commodities such as petrol, flour, airtime charges and bank rates among others, has been the daily wake of every Kenyan. The Finance Bill, 2021 (“the Bill”) proposes to expand the definition of the term control. On its part, the bill has made changes on the Income tax, the VAT act, the Excise Duty Act, the Tax procedures Act, the miscellaneous fees and Levies Act, as well as the Capital Markets Act, the Central Depositories Act, the Kenya Revenue Authority Act, the Insurance Act and the Retirement benefits Act. The main aim for this changes was help the country budget meet the budget estimates for the FY 2021/22, a scenario that has left MSMEs on an island dry of better standards of living.

The finance bill 2021 has brought so much pain to the Micro, Small and Medium Enterprises pockets.

“Dear customer, due to excise duty rising to 20%, effective 7^th July, our product pricing including voice, data and SMS has been reviewed to reflect this change.”

Such a message from Safaricom one of the biggest mobile connectivity company in Kenya is not new to MSMEs for the last one week. The company which has been on the forefront standing to help these business entities has had to move a step higher too to fit their daily runs with the change induced by the finance bill 2021.

Yet again, M-shwari, a mobile lending platform to MSMEs has had to make its own changes. By an increase of 20% duty to changes done on the excise duty, most borrowers will have to filter all their investment just to payback on the gap created.

The changes which seek to cushion the economy from the had hit Covid-19 pandemic will see Kenyans crawl even more just to meet their needed pact suggested by the National treasury. With the Energy and Petroleum Regulatory Authority (EPRA) increasing the price of super petrol by Ksh3. 56 ($0.03) per liter while that of diesel and kerosene remain unchanged for the period that ended May 15 to June 14. The latest price review pushes the price per liter of super petrol in Nairobi to Ksh126.

Also Read:

1. Why MSMEs are still winning in the Kenyan Economy
2. Mombasa MSMEs on Fire as Kongowea Burns
3. 8 Tips for a Successful Family Business

Kenya is the economic, financial, and transport hub of East Africa. In the last decade, the real gross domestic product (GDP) growth has averaged over 5%. The measures undertaken by the ‘Big Four Agenda” to boost the manufacturing sector, enhance food security and nutrition, build affordable housing, and achieve universal health coverage are expected to enhance growth, create jobs, and promote inclusive growth. However the financing of such projects has been left on the Kenyans who only depend on small businesses for survival

Despite the fact that MSMEs have been triumphing in economic performance, the new tax burden has overlooked the steady growth and has a lot to be done not just yet.

“In preparing the estimates we have been very alive to the current challenges of the ongoing pandemic, while ensuring that we continue on a steady path of economic recovery, by investing Ksh 26.6 billion on the post COVID-19 economic stimulus program (9PC-ESP) AND Ksh 135.3 billion on the president’s big four agenda covering universal healthcare, food and nutrition, manufacturing and affordable housing,” said the treasury boss Ukur Yatani on April this year.

It is quite unfortunate that MSMEs have to face the full throttle of the taxes to help the economy which is being hit hard through supply and demand shocks on external and domestic fronts, due to Covid-19, which basically interrupts the recent broad-based growth path.

As outlined in the Government Budget Policy statement 2021, the Kenyan economy contracted in the first and second quarter of 2020. There were signs of recovery in the third quarter following the reopening of the economy. The Government Budget Policy statement projects a growth from 3.8% in FY 2020/21 to 6.1% due to growth envisaged by the MSME sector.

Last year, the Finance Act, 2020 introduced a minimum tax of 1% on gross turnover. The minimum tax will not be applicable to exempt income, employment income, residential rental income, capital gains, persons undertaking mining or upstream oil and gas activities, persons subject to turnover tax, insurance business and any business whose retail price is regulated by the Government.

In a simple genesis of how MSMEs will have to crawl based on the taxes was directed to the “minimum tax intended for taxpayers who are carrying out business and thus earning revenue, but their tax payable is lower than 1% of their gross turnover. The minimum tax will be a final tax and is payable in instalments that are due on the same date as the current instalment tax obligations (i.e. on the 20th day of the fourth, sixth, ninth, and twelfth month of a company’s financial year),” as broken down by Jacqueline Waihenya, advocate at High court of Kenya.

On 19 April 2021, the High Court issued a temporary order suspending the implementation of the new minimum tax on business gross revenues pending the full hearing of court cases filed by certain taxpayers. Should the Kenya Revenue Authority win the case, minimum tax will be due on a retrospective basis.

The rate of turnover tax has been lowered from 3% to 1%. This is applicable to MSMEs.

MSMEs earning below 1 million Kenya shillings (KES) are exempt from turnover tax to cushion them against the negative impact of the COVID-19 pandemic. However, MSMEs exempted from turnover tax will still be required to declare and file their corporate tax returns, the biggest blow that’s penalize if not filed again. The upper threshold in respect of the turnover tax has increased from KES 5 million to KES 50 million.

As by 1^st January 2021, the Digital Service Tax had been reviewed as The Finance Act, 2020 introduced a 1.5% tax on income from services accrued or derived in Kenya through a digital marketplace. With the increased E-commerce platforms in the country from MSMEs, the tax is applicable on the gross transaction value of the service provided and is due at the time of payment. The responsibility to account for the tax is on the owner of the digital marketplace or an agent appointed by the Commissioner.

It is to the accord of Kenyans that all these changes have been the cause of the many filters that have impacted negatively on the economy. Yet again the problem, reflecting the changes has not been loose, county governments will soon land on the necks MSMEs trying to choke them with heavy taxes, in order to remit tolerance of their pay to the central government.

Also Read:

1. Go Get Paid! MSMEs New hope as Council of Governors announce County Fund release
2. Kenya’s 2021-22 budget and its aim on MSMEs Fiscal accommodation
3. Are MSMEs the only hope left that can stop Mombasa Becoming a Ghost Town?

The only winner, so far are the local exporters in the transport sector as they have won their appeal on making their movements ‘tax free’. The Income tax has created an overhaul that cannot be differentiated, an automatic impact on the pay as you earn (PAYE) that lengthens the tax ratio for the first time ever since the small signs in the great economic depression of 2007.

More is yet to come to MSMEs, some taxes such as the VAT, excise duty and income tax, already took the first pinch in the market by the 1^st of July 2021. The best truce MSMEs could implement is to maximize on their production and eliminate the heterogeneous losses that has been affecting them. With accuracy the will of success will finally knock.

Generally, living standards of Kenya is rising at an alarming state. There is need to revisit the loans and help MSMEs continue to perform well. More else we are in the dark state of the nation, and it’s heavily messy down here.

Mombasa, Kenya.

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