When you buy a phone charger or a piece of fruit from a street hawker in Nairobi, you probably do not think about taxes, especially Value Added Tax (VAT). The transaction is simple, cash-based, and exists entirely outside the formal tax system.
But appearances can be deceiving. While these hardworking entrepreneurs may not file a VAT return, they are, in fact, a crucial part of the Value Added Tax ecosystem.
This article peels back the layers to show how street hawkers contribute significantly to the country’s VAT revenue. We will explore the often-overlooked mechanics of how this tax system works. We will also detail why the government needs to work with, not against, this vital part of the economy.
The Invisible VAT Chain: How Hawkers Pay Their Share
In Kenya, the model of Value Added Tax, or VAT, used is the consumption-based model. The VAT is meant to be levied at each stage of a product’s journey. This is from production or import to the final sale to the consumer.
The final burden of the tax is on the consumer. However, VAT-registered businesses collect it along the way. Here is how this system connects to street hawkers:
a. The Wholesale Link
Most street hawkers are not manufacturers or large-scale importers. They buy their stock from wholesalers who are part of the formal economy. These wholesalers, with turnovers often exceeding the KES 5 million VAT registration threshold, are required to be VAT-compliant.
When they sell goods to a hawker, the price they charge includes the VAT. This is VAT that they have paid on their purchases (input tax) plus the VAT they are required to charge on the sale (output tax).
b. The Embedded Tax
The street hawker pays for this embedded VAT when they purchase their goods. This means that a portion of every shilling they spend on stock is a contribution to VAT revenue that is then remitted to the tax commissioner at the Kenya Revenue Authority (KRA) by the wholesaler.
A hawker selling soft drinks, for example, purchases their crates from a distributor who has already remitted VAT to the government.
c. Consumption at the End of the Line
When the street hawker sells their products, they typically do not charge or remit VAT. However, because the tax was already paid at earlier stages of the supply chain, the government has already collected a significant amount of revenue from that product.
The final price the consumer pays, even on the street, reflects the VAT that was paid further up the chain. This makes hawkers a critical, albeit informal, channel for a large volume of VAT-contributing goods.
This dynamic shows that street hawkers are not evading VAT entirely. They are simply operating in the final, informal stage of a chain where VAT has already been collected. The real challenge is formalising their businesses to capture the final portion of the tax, thereby increasing total VAT collection.
The Path to a Win-Win: How the Government Can Help
Simply treating street hawkers as tax dodgers is a lost opportunity. By creating an enabling environment, the government can turn these hidden taxpayers into direct contributors. This will unlock a massive new stream of revenue and empower millions. How can this be done
a. Simplified Tax Regimes
One of the most significant barriers for street hawkers is the complexity of the formal tax system. Introducing a simpler, more user-friendly tax regime, like a low-rate presumptive tax based on a simple formula or a trade license fee, can bring them into the fold.
This will be without the administrative burden of traditional VAT filing. Kenya has experimented with these kinds of taxes, but better implementation and outreach are needed.
b. Digital Solutions
The KRA’s eTIMS system is a step toward digitising tax records and documentation. It can be adapted to make it easier for small traders to comply. Providing simple, mobile-friendly platforms for small-scale record-keeping and tax payments could bridge the gap between the informal and formal economies.
c. Incentives and Benefits
Why would a street hawker formalise their business? The government must provide a clear answer. It can link formalisation to benefits such as access to micro-credit, business training, and secure trading zones. This way, the government can show that tax compliance offers a tangible return on investment. This will foster trust and encourage voluntary participation.
d. End the Harassment
The constant clashes between hawkers and local authorities not only disrupt trade but also create a deep sense of mistrust. By providing designated business zones and ending harassment, the government can build a partnership with hawkers. This will make them more willing to engage with formal systems.
