Government and Policy

Promoting Equity, Fairness, And Justice In Taxation For Kenyan SMEs And Ensuring Parity With Foreign Firms; The Pesapal case

BY Steve Biko Wafula · July 2, 2023 02:07 pm

KEY POINTS

Equitable taxation policies not only benefit local SMEs but also contribute to regional competitiveness. When African governments, including Kenya, demonstrate fairness and justice in taxation, they set a positive example for other countries in the region.

KEY TAKEAWAYS

Equitable taxation policies can help reduce income inequality by ensuring that the tax burden is distributed fairly among all businesses. This promotes social justice and addresses the disparities between local SMEs and foreign firms.

I have always been and will always be Pro-SMEs because this is where the magic and this is where innovation takes place. This is where the best training for future CEOs, Managers, and Leaders is molded.

This is where the essence of learning about entrepreneurship happens. Of late, many SMEs in Kenya have been getting demand letters from KRA, especially if they are now big and are competing with other peer firms of foreign origin.

The case of Pesapal and the KRA demand got me thinking about why it is important for Entrepreneurs to come together and have an AA kind of group but for entrepreneurs to support each other.

This is a matter that should be on the floor of parliament. Thousands face unemployment. This riled me up so much that I decided to read and research some more on what SMEs are going through in Kenya.

In the context of globalized economies, the issue of equity, fairness, and justice in taxation becomes crucial for small and medium-sized enterprises (SMEs), particularly in developing countries like Kenya. While governments strive to attract foreign investment, it is equally important to ensure that local SMEs are not burdened with unfair tax policies.

I am a Champion for SMEs. I am a Pro business. I am pro-positive Government policies BUT am for honest and real conversations around issues that affect us greatly. Why the Kenyan Government and its agencies need to be fair and very supportive of the SME ecosystem is very simple. Even my young son understands why it’s important to support SMEs, hence I expect the government to, but I could be wrong, given the decisions they have been making of late.

Here is why;

Encouraging Local Entrepreneurship:

Promoting equity in taxation means treating local SMEs on par with foreign firms. By providing a fair tax environment, the Kenyan government can encourage local entrepreneurship, allowing SMEs to thrive and contribute significantly to economic growth. If a startup is pushed into bankruptcy, as a country, we will lose so much in terms of knowledge, tech transfer, and innovative ideas when its employees will be rendered redundant.

Creating a Level Playing Field:

Tax policies should aim to create a level playing field for all businesses. When foreign firms enjoy tax advantages over local SMEs, it distorts competition and hinders the growth potential of domestic enterprises. Pesapal deserves the same treatment other peers got during COVID-19 because that is only fair and right.

Fostering Investor Confidence:

Treating local and foreign firms equitably in taxation builds investor confidence, attracting foreign direct investment while reassuring local SMEs that they will not be unfairly disadvantaged. Given that SMEs run the Kenyan economy, then it’s only fair to protect them and seek solutions that give them the opportunity to grow.

Enhancing Tax Compliance:

When SMEs perceive tax policies as unfair, they may be more inclined to engage in tax evasion or avoidance. By implementing equitable taxation practices, the Kenyan government can enhance tax compliance and revenue collection.

Promoting Economic Development:

Local SMEs are vital for economic development as they create employment opportunities and contribute to innovation and technological advancement. Fair taxation ensures that they have the necessary resources to grow and thrive.

Case Example: XYZ Manufacturing Ltd:

XYZ Manufacturing Ltd, a Kenyan SME, faced challenges when the government imposed higher taxes on local manufacturers compared to foreign companies. This disparity in taxation placed an unfair burden on XYZ Manufacturing Ltd, impeding its growth and competitiveness.

Encouraging Local Value Addition:

Equitable taxation policies can incentivize SMEs to engage in local value addition, encouraging them to invest in machinery, technology, and research and development. This, in turn, promotes industrialization and reduces reliance on imports.

Case Example: ABC Agro-processing:

ABC Agro-processing, a local SME in Kenya, struggled with unequal tax treatment compared to foreign agro-processing firms. The higher tax burden on ABC Agro-processing reduced its capacity to invest in modern equipment and hindered its ability to compete effectively.

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Strengthening Domestic Supply Chains:

Supporting local SMEs through fair taxation practices strengthens domestic supply chains. When SMEs flourish, they create demand for raw materials and services from other local businesses, fostering economic growth and sustainability.

Case Example: LMN Construction:

LMN Construction, a Kenyan SME, faced challenges when foreign construction companies enjoyed tax exemptions and incentives not available to local firms. This created an uneven playing field, impeding LMN Construction’s growth and market share.

Reducing Income Inequality:

Case Example: PQR Retail Chain:

PQR Retail Chain, a local SME in Kenya, struggled with high tax rates while foreign retail chains enjoyed tax breaks. This unfair treatment hindered PQR Retail Chain’s ability to expand, limiting job creation and income generation.

Promoting Regional Competitiveness:

Strengthening Government Revenues:

By promoting fairness in taxation for local SMEs, the Kenyan government can ensure sustainable revenue generation. A thriving SME sector contributes to increased tax revenues, reducing the dependence on foreign aid or loans.

Case Example: UVW Creative Services:

UVW Creative Services, a Kenyan SME in the creative industry, faced challenges when foreign competitors enjoyed tax incentives that were not available to local firms. This hindered UVW Creative Services’ growth and limited its ability to invest in talent and innovation.

Building Trust and Cooperation:

Equity, fairness, and justice in taxation build trust and cooperation between the government and local SMEs. It fosters a positive relationship, allowing for constructive dialogue and collaboration in addressing challenges and formulating effective tax policies.

Encouraging Sustainable Development:

Fair taxation practices support sustainable development goals by ensuring that local SMEs have the necessary resources to adopt environmentally friendly practices, invest in renewable energy, and promote social responsibility.

The issues raised are not unique to Pesapal but the reason why Pesapal is unique is because it’s the one critical local SME in the Fintech ecosystem that has developed and creatively helped grow the sector, making Kenya to be renowned for creative and innovative products. It is an SME that deserves the attention of Parliament and the Senate so that it can be the firm that helps push for better engagement between KRA and SMEs. Conflicts happen so that we can create solutions that will be applied across the board. I challenge you to read up on Pesapal and find out who they are and why they are on my radar and together let us push for this conversation to happen for the betterment of us all. Because today it is them, tomorrow it could be you or me.

It is important to remember that the importance of equity, fairness, and justice in taxation cannot be overstated for African governments, particularly the Kenyan government, in their treatment of local SMEs. By providing a level playing field, encouraging domestic investment, and promoting regional competitiveness, governments can foster economic growth, reduce income inequality, and strengthen government revenues. Real-case examples of Kenyan firms facing tax issues underscore the urgency for equitable taxation practices. Ensuring parity between local SMEs and foreign firms not only benefits the SME sector but also contributes to overall economic development and social justice.

About Steve Biko Wafula

Steve Biko is the CEO OF Soko Directory and the founder of Hidalgo Group of Companies. Steve is currently developing his career in law, finance, entrepreneurship and digital consultancy; and has been implementing consultancy assignments for client organizations comprising of trainings besides capacity building in entrepreneurial matters.He can be reached on: +254 20 510 1124 or Email: info@sokodirectory.com