When you think of income tax, your mind likely goes to salaried employees with a KRA Personal Identification Number (PIN) and a monthly Pay As You Earn (PAYE) deduction. But what about the millions of Kenyans who earn their living on the streets, the resilient entrepreneurs we call street hawkers? Although they may not have a payslip, their economic activities are more closely tied to the country’s income tax revenue than you might think.
This article delves into the often-overlooked ways street hawkers contribute to the national treasury. We will explore their indirect role and the crucial efforts by the government to formalise their contribution. This move could unlock a massive additional stream of revenue and create a more equitable tax system for everyone.
The Invisible Contribution to Income Tax
The simplest way to understand the connection between street hawkers and income tax is to follow the money. While a hawker’s direct earnings might not be subject to a formal payroll tax, their business activities generate taxable income for others in the formal economy. How do they contribute?
a. Fueling Formal Businesses
A street hawker needs a steady supply of goods to sell. They buy their stock from wholesalers, distributors, and manufacturers who fully comply with the tax laws. The profits these formal businesses earn from selling to hawkers are subject to corporate income tax. This is one method of collecting income tax in this country.
b. The Power of Consumption
Every shilling a street hawker earns is a shilling they spend. They buy food from restaurants, pay rent to landlords, and purchase transport services. The profits earned by these businesses, and the salaries and wages paid to their employees, are all subject to various forms of income tax. So, when a hawker buys a meal from a local kibanda (food stall), they are contributing to the income of the business owner and their staff, who in turn pay their income taxes and PAYE.
b. The Presumptive Tax Model
Recognising the potential of this sector, the government has made several attempts to tax street hawkers and other small-scale traders directly. The most notable of these are the Turnover Tax (TOT) and the Presumptive Tax. The Presumptive Tax (currently suspended), introduced in 2019, aimed to simplify the process by linking income tax to county government business permits.
It was an apparent attempt to formalise the income tax contribution of the informal sector. While there have been challenges in its implementation, it remains a key tool for bringing this large segment of the economy into the tax net.
Example:
Consider a street hawker selling maize. They buy their stock from a farmer or a broker. Sales proceeds for the broker make up their income tax base. The hawker’s earnings are then used to pay for a matatu ride (transport service), which generates income for the owner and the crew. The matatu owner and crew are all required to pay various taxes, including income tax. It is a continuous cycle that silently supports the tax system.
The Win-Win: Tapping into the Informal Sector for Income Tax
While many view the informal sector as a tax drain, bringing the sector into the formal tax net offers a clear win-win for both the government and the hawkers themselves. Let us explain:
a. Broadening the Tax Base
The informal sector employs over eighty percent (80%) of Kenya’s workforce. By effectively taxing this sector, the government can significantly expand its income tax base. This will reduce the burden on the few salaried employees and increase revenue for public services.
b. Avenues for Growth
Formalising street hawkers’ businesses is not just about collecting taxes. It is about providing the street hawkers with a legitimate platform. A formal business can apply for loans, secure contracts, and expand operations. By requiring a KRA PIN and simplifying the tax process, the government can empower hawkers to grow their businesses and create more jobs.
c. Data for Better Governance
Bringing street hawkers into the tax system provides the government with valuable data on the informal economy. This data can be used for better economic planning and resource allocation. Additionally, the data can be used for targeted support programs that are tailored to the needs of most of the working population.
Final Thoughts
The biggest hurdles to this are mistrust, high compliance costs, and a lack of awareness. Many street hawkers see tax collectors as a threat rather than a partner. To succeed, the government must shift its approach to one of collaboration and incentives, not just enforcement.
