(Lender) When the Kenya Revenue Authority (KRA) in January introduced new tax rules, small businesses were the first to complain that they were being unfairly targeted. It is estimated that up to half of the country’s small and medium entrepreneurs could close shop if the tax regime does not change. This comes at a time SMEs and even established companies are reeling from the economic effects of the coronavirus pandemic. While commenting on the current “harsh” tax environment, Peter Macharia, the CEO for the micro-lender Jijenge Credit urged the country’s financial authorities including the National Treasury and the Central bank of Kenya to relook the country’s taxation laws in order to rescue the already strained SMEs
“The tax regime is currently very punitive especially for the Micro Small and Medium Enterprises (MSMEs),” said Mr Macharia. “Actually I can foresee a lot of tax evasion and by and large the government may not meet its target in revenue collection from this class of taxpayers.”. At the beginning of the year, KRA informed the public on changes of tax rates introduced through the Tax Laws (Amendment) Act of 2020 which was published last year on December 24 particularly on Corporation Tax, and Legal Notice No. 206 of 2020 on Value Added Tax. The new tax rates replaced those introduced in April 2020 to cushion the struggling businesses most of which were hit by the pandemic and are yet to recover from its effects. KRA had last year reduced the rate of VAT from 16 per cent to 14 per cent which affected the VAT returns that were to be submitted after April, 2020. It reversed that decision in January 2021 – a decision that continues to hurt most SMEs. Since April last year, the adverse effects of the pandemic have compelled many businesses to change tack, upon realizing that finances are just one of the many aspects that make a business healthy and thriving.(Lender)
While funding for SMEs remained critical after the coronavirus restrictions were eased, Mr Macharia says that their significance has now lessened due to the high tax demands by the KRA – arguing that it could push many SMEs out of business. MSMEs continue to face difficulty in accessing affordable finance from banks owing to the apparent high-risk perception at play, asymmetric information, and micro and small enterprises’ lack of collateral. “For the first three years for most startups is losing making…so those companies that are trying to survive if you try to further tax them when they are already making losses, you will be pushing them out of business,” says Macharia, who also called on the government to maximally simplify the Credit Guarantee Scheme if the SMEs are to benefit from it. The Public Finance Management Regulations last year set up a Sh3 billion stabilization facility to enable the participating banks namely; Absa, Co-op, Credit Bank, DTB, KCB, NCBA and Stanbic to extend credit to MSMEs that meet the requirements, including compliance with tax obligations and business permits and having a good credit standing. The finance was initially meant to be utilized for working capital, acquisition of assets and recovery from Covid-19 impacts, but many SMEs are yet to lay their hands on the kitty. “I am yet to meet one single SME that has benefitted from the funding. The government needs to shout more about it,” quipped Macharia. While it was hoped in many quarters that the ongoing pandemic was a shortterm problem that would get managed well and blow over quickly, sadly that’s not the case. Several months into various levels of lockdowns in some parts of the country, the drama continues with continued job losses, personal financial setbacks and more. The hardest hit sectors, mainly manufacturing, trade, real estate, agriculture, education and transportation, even after the easing of restrictions by the Government, are still reeling from the impact of the pandemic. “Generally the performance (lending) has been very low, we are operating at 40 per cent lower compared to what we were doing in the last two years. This is because of the reduced business activities, retrenchments, and lack of recruitment by firms and few tenders but on the flipside, incidentally personal lending has been on the rise,” says Macharia on the performance of Jijenge Credit in the first quarter of the year. “But we have enhanced our credit analysis,” he says. In October last year, Jijenge Credit received approval for rollout of a digital interface check-off system targeting government employees for loan offers against their pay slips. Initially the company had targeted to loan out up to Sh200 million to the government employees drawn from various ministries and Parastatals in the first six months. The government on Wednesday rejected a Sh68 billion request to finance increment of salaries and allowances starting July 1 – a request that would have made available money to fund the next phase of pay reviews for civil servants and teachers, a target market for Jijenge. “We have since decided to glow on this because of the current changes in the public service but the money is readily available for them,” he said.