There are at least 16.7 million small businesses in Kenya. The numbers might be higher, given that the majority of those in the informal sector are unregistered. The available numbers indicate that 90 percent of Kenyan businesses are SMEs. That leaves only 10 percent for the “big boys.”
The SME sector in Kenya employs 87.5 percent of the population and contributes about 45 percent to the country’s gross domestic product (GDP). This is not a sector that can be ignored. To say the least, it is the backbone of Kenya’s very economic existence and survival.
Despite being such an integral part of the livelihood of our nation, stats show that at least 450,000 SMEs are dying annually. This translates to at least 30,000 monthly and 1,000 daily. Ironically, as one dies, others are being registered, and the cycle keeps on repeating itself.
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But what leads to the shutdown of so many small businesses in Kenya?
If I tell you that failure to file your tax returns might be the number one contributor to the failure of so many businesses in Kenya, you will say that I have been paid to say so. Far from it. I once owned a business that went into a coma and died months after, and the number one mistake I ever made was to ignore filing my tax returns and getting that tax compliance certificate (TCC).
In my ignorance, which I thought was wisdom, I always believed that as long as the Kenya Revenue Authority (KRA) was not knocking at my door demanding for taxes, I was safe. But you know what, the truth is, KRA never came after me, but I still folded up my business anyway.
This is what happened. My business was going through a rough time. I approached my banker and requested credit. I needed that cash to show how liquid I was to manage a tender that my business had won. I had everything in order. My banker was impressed. However, there was a slight problem; I did not have a tax compliance certificate.
I rushed to KRA, but the penalties had accumulated to high levels. I couldn’t settle them at once, get a loan and finance my tender. I lost the tender and lost the business. Of course, my wife, who had gotten used to the soft life that came as a result of my sweat, left me for another guy who I suppose was wise enough to be filing his tax returns on time. So, I lost a wife too. So, no business, no wife, no money.
I do not want you to make the same mistake I did. That is why I want to tell you something about tax returns and why you should file them. There shall come a time when you will look back and say, “That wifeless man helped me avoid one of the biggest mistakes in my life.” And maybe you will say a little prayer for me.
What is a tax return? A tax return is a declaration made by a taxpayer of all income earned during a year of income, detailing the tax payable or refund claimable in the year of income.
A tax return summarizes the income earned and taxes paid (if any) in a year of income. In Kenya, the year of income for individuals runs from 1st January to 31st December, and they are required to file their returns between 1st January to 30th June following the year of income. For companies, the filing is done within six months after the end of the accounting period.
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Why should you file your returns? I have five reasons why:
Filing returns is a sign you are responsible: The government mandates that individuals who earn a specified amount of annual income must file their returns within a pre-determined due date. Filing returns is a sign that you are responsible. Not just that, it also makes it easier for individuals and businesses to enter into subsequent transactions since their income is recorded by the tax department with applicable tax, if any, having been paid. Remember my sad story?
Filing returns is a legal requirement according to section 52B of the Income Tax Act cap 470. The law provides that every person with taxable income is required to file their returns. Kenya operates on a self-assessment tax regime where every person is required to assess himself or herself and declare the income earned during the year and pay any taxes due. Filing of returns and payment of taxes therefore ensures that one is compliant with the Kenyan tax laws. There are no two ways about this.
If you plan to apply for a home loan in the future or any other loan for your business, it is a good idea to maintain a steady record of filing returns as the home loan company will most likely insist on it. You may even consider filing your spouse’s returns if you want to apply for a loan as a co-borrower. Likewise, even credit card companies may insist on proof of return before issuing a card. Financial institutions may insist on seeing your returns over the past few years before transacting with you. The government may make it mandatory for them to do so, thereby indirectly nudging individuals to file returns regularly even when it’s voluntary.
Filing returns on time has many advantages regardless of whether you draw the prescribed level of income necessary to file returns. Various losses incurred by an individual or a business, both speculative as well as non-speculative, short-term as well as long-term capital losses, and various other types of losses not recorded in the tax return in a financial year, cannot be shown for exemption in subsequent years for tax calculation. So it’s best to file returns regularly because you never know when you may want to claim an adjustment against past losses.
lastly, filing returns enables Kenya Revenue Authority reconcile the tax deducted from employees’ income under the Pay As You Earn (PAYE) system and the declarations made by employees at the end of the year. Return filing therefore enhances accountability of taxes deducted from employees.
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