Ministry wants lower tax rates for small companies

The trade ministry plans to initiate preliminary talks with the Treasury with a view to further easing the tax burden on micro-, small- and medium-sized enterprises (MSMEs) beyond income tax to free up cash to support growth and creation of new job opportunities.

Trade and Industry Cabinet Secretary Peter Munya said MSMEs should enjoy a lower tax regime than the standard rate applicable to general businesses.

The Treasury implemented a special income tax regime for smaller businesses with annual revenue of less than Sh5 million in January 2019 in a bid to increase tax compliance.

Businesses whose annual turnover falls in that bracket are obligated to pay a presumptive tax at the rate of 15 per cent of the annual single business permit fee issued by a county government.

This is considered friendlier and lower than the standard 30 percent tax that businesses pay on annual profits in quarterly installments.

“We are going to sit down with our technical people to see how we can reduce that tax burden by bringing a new regime for the SMEs,” Mr Munya said.

The proposal is geared at having the income tax incentive extended to import duty paid on raw materials.

The move, if accepted by the Treasury and implemented, will see MSMEs enjoy some rebates on importation of raw materials, closer to exports-focused firms under the Export Processing Zones (EPZ) which enjoy exemptions on inputs largely to sustain foreign exchange earnings.

“MSMEs need to be separated from mainstream (businesses). There’s need for a registrar of MSMEs and they also need to be trained on certification and standardisation,” Mr Munya said.

MSMEs, which account for an estimated 80 percent of jobs in Kenya and a third of the gross domestic product (GDP), are expected to play a major role in delivering under the manufacturing pillar of the Big Four plan between 2018 and 2022.

Under the ambitious socio-economic transformation plan, the government targets to facilitate setting up of additional 1,000 SME factories in such areas as agro-processing, leather, textiles and fish-processing to achieve the target of a million fresh decent jobs by 2022.

Ms Wangechi Muriuki, the country director for Invest In Africa (IIA), said implementation of the 40 percent local content quota in public procurement will be key in supporting growth and expansion of the MSMEs, besides tax incentives.

“There should be a deliberate focus on local content quota across the sector which will then flow to the MSMEs,” Ms Muriuki said.

“We should understand the holistic direction of where this (local content quota) is going and see how we can create a snowball effect because you have to start with large players and then the benefits and expertise flows to the MSMEs.”

IIA, an online platform, was started in 2017 to link the MSMEs to opportunities in large firms and multinationals.

“In just two years, we have been able to register 2,250 MSMEs registered on our platform and recruit over 20 partners who have provided 67 tenders worth Sh270 million,” Ms Muriuki said.

“Additionally, over 200 MSMEs have been trained and over Sh300 million of financing unlocked through these partnerships.”

Mr Munya said most of the incentives for the MSMEs will be implemented through the National Investment Policy, which has been approved by the Cabinet and is now awaiting nod from legislators under the Statutory Instruments Act, 2013.

“The policy is general and the next level is to introduce specific interventions which we will implement to support the SMEs,” he said.

The draft policy empowers the proposed National Investment Council, which will be chaired by the president on enforcement, to recommend “activities where foreign investment is restricted to allow protection of national investors in sensitive areas.”

The list should be approved by the Cabinet and reviewed periodically, the draft states.

“There are certain sectors that we want to ring-fence for local businesses so that we will demand, even investors in those sectors to have joint ventures and partnerships with locals. This will support small businesses to grow,” Mr Munya said.