Tax evaders ditch mobile payments to beat KRA

The Kenya Revenue Authority has flagged a growing number of business owners ditching mobile merchant payment accounts and reverting to cash transactions since it enhanced compliance checks in major towns last month.
The taxman said it has noted a trend where businesses, which used to get payments through Lipa Na M-Pesa Buy Goods Till numbers, are now asking customers to pay cash.
This comes a month after the KRA deployed some 1,400 revenue service assistants with paramilitary training to help enhance tax compliance amongst traders, including the facilitation of online registration of businesses.
“It is already noted that (closure of Lipa Na M-Pesa merchant accounts) is what is happening in the market. We are working on strategies on how we can work around this,” Caroline Rotich, the KRA’s chief manager in the Domestic Taxes Department, said on Tuesday.
The KRA said it will be seeking information from Safaricom on merchants who have opted out of the M-Pesa Buy Goods and Pochi La Biashara tills in a bid to catch tax cheats.
Safaricom’s Lipa Na M-Pesa Buy Goods Till has been popular amongst small traders in recent years as it enables them to collect payments on their till and use the same cash to settle bills such as wages and commissions to employees.
Pochi La Biashara is tailored for the registration of informal business owners such as food vendors, kiosk owners, boda boda operators and second-hand clothes dealers. This enables them to “receive and separate business funds from personal funds on their M-Pesa number”.
“Working together with Safaricom to facilitate with integration, we will get information on these drop-outs so that from there we can do follow-ups and compliance checks,” Ms Rotich said.
“We have several officers now who are doing compliance checks around the main towns. This will help us address this issue.”
Small traders with annual sales revenues of between KSh1 million and KSh25 million are from July required to pay turnover tax at the rate of three percent of gross annual sales. This is a jump from the previous requirement of one percent charged on gross sales of between KSh1 million and KSh50 million.
The KRA is leveraging on increased use of third-party data to help hit a target of nearly KSh2.5 trillion for the current financial year ending June 2024 in exchequer revenues from about KSh2.17 trillion the year before.
The Tax Procedures Act allows the taxman to link it’s i-Tax system with third parties such as banks and mobile money platforms like M-Pesa to spy on taxpayers’ activities.
The taxman has in recent years come under fire from business lobbies such as the Kenya Association of Manufacturers and the Kenya National Chamber of Commerce and Industry for over-burdening a few persons in the formal sector with taxes, while a majority of the population remains outside the tax bracket.
President William Ruto has directed the taxman to be friendlier and more efficient in a bid to enhance compliance levels in an economy dominated by the informal sector in his bid to “collect every shilling due”.
“A huge obstacle to the realisation of our national revenue target is that in practice tax administration has traditionally been a repressive, menacing affair which resembles extortion,” Dr Ruto said after taking power in September last year.
“This extinguishes taxpayer incentive and diminishes the prospect of an expanded tax base, pulling Kenya backwards from it’s national revenue potential and denying its citizens critical services and development programmes.”
The taxman is banking on the revenue service assistants to help ramp up compliance levels amongst traders operating in the informal space after various initiatives aimed at roping them into that tax net failed to yield targeted returns.
The revenue assistants, deployed in major towns, are tasked with collecting data on taxpayers by conducting market surveillance to identify non-registered traders, and continuous patrols to ensure customers are issued with tax receipts following the rollout of the Electronic Tax Invoice Management System (eTIMS).
Businesspersons who have encountered the officers say they are demanding to see the premises’ business permit, cash and receipt books, mobile money statements, including all M-Pesa till and paybill numbers, wage schedules, tenancy agreements, and rent receipts.
“Feel free to approach them, say hello, and let them know how they can assist you,” said the taxman in a notice to taxpayers dated 18 September, 2023 that announced the deployment of the new tax enforcers.
The KRA has been going after the hard-to-tax sectors of the economy, largely small traders operating in informal spaces.
“The hard-to-tax sectors are characterised by informality, limited record-keeping, lack of visibility of transactions by taxpayers in this sector and inadequate regulation,” the Treasury wrote in it’s draft medium-term revenue strategy.
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