By Rev. Canon Francis Omondi

 Our government is choosing to extort the poorest businesses and trying to make a virtue of it.

Imposing the 3% Turnover Tax (TOT) on informal micro and small businesses is monstrous, and a disdain to the weaker Kenyans. Though legal, TOT is IMMORAL. I echo the prophetic declaration: “Woe to those who make unjust laws, to those who issue oppressive decrees, to deprive the poor of their right and withhold justice…” (Isaiah 10:1 NIV)

The micro and small-scale businesses, operating kiosks, grocery stores, salons or any small market traders, at the bottom tier of the informal sector, are now to pay TOT. A tax demanded of any resident person whose turnover from business does not exceed or is not expected to exceed Kshs. 5,000,000 during any year of income. It will be payable from 1st January 2020. They make this tax rate on the gross sales/turnover and is a final tax. Mrs. Elizabeth Meyo, the Commissioner of Domestic Taxes at the Kenya Revenue Authority (KRA), states that “from January 2020, if one operates salon, butchery, or grocery store, you will be required to declare your sales online and pay the taxes on the 20th of each month.[1]” And for one to get a business licence from their county government, they will have to pay an extra 15 percent of the permit fees to KRA as presumptive tax. In complying to these new demands, Mrs. Meyo further declaims, “the business owners will have fulfilled their patriotic duty for a better Kenya”.

Various economic findings acknowledged the substantial contribution of the informal sector in most developing countries to their Gross Domestic Product. The informal sector is one of the biggest employers in Kenya, and accounts for over 80 percent of employment opportunities. It is a shame that attention is turning to this sector only for their moolah, and to bridge the gap resulting from dwindling revenue from the formal sector. According to Zachary Mwangi[2], the monthly expenditure on salaries and wages for unlicensed Micro Small Medium Enterprises (MSEMs) was Ksh 9.0 billion which translates to 25.0 percent of total outlays a piece. The number of persons engaged in MSEM was approximately 14.9 million with unlicensed enterprises contributing 57.8%. Paid employees were 4.0 million.

The colonial market design continues to define the contours of our economy, which conditions us to think of the informal sector to be inferior to the formal. We still perceive it as ‘traditional’, marginal or peripheral, having no link with the formal economy for modern industrial development. We have therefore neglected this sector. Some economists have argued, of  it as a dead-end for a pool of labour considered comprising workers who could not gain entry into the preferred formal sector. Others like Jeffery Sachs have even gone to pronounce the informal sector’s obituary stating that it would cease to exist once Kenya achieves sufficient levels of economic growth and industrialization.

Others saw the potential of the informal sector’s small businesses. Economist De Soto (1989)[3] viewed these informal businesses as a sign of entrepreneurial dynamism, with real force in the market. And could be useful in industrial take-off, due to their resilience to dig in and ability to withstand market shocks over a long haul as Shem Watako observed in his doctoral studies of micro and small businesses in Kariobangi. (2016:204)[4]

This hubris in the informal sector has got the taxman’s attention. But the challenge is in how they will implement the TOT. Mrs Meyo identifies this difficulty, while responding to why Kenya resorted to TOT for small businesses, in the “lack of formal structures and a tax framework that suits the sector have been major drawbacks in the taxman’s quest to tap revenue from this sector.”

The ethical reasoning of those calling for the micro and small-scale businesses pay taxes as demanded is implausible, because it does not raise the second order question. Is it moral to make these demands on the poorest of Kenyan businesses?


Is it moral to treat the poor with partiality, when the new tax regime would disenfranchise them?

A turnover tax is like a sales tax or a value added tax (VAT), with the difference that it taxes intermediate and capital goods, as Kimaru and Jagongo[5] argue. It is on an ad valorem basis (based on the value of the good in question, rather than being flat taxes), applicable to a production process or stage. TOT makes the poor to pay another indirect tax, while those above the cut off of 5 million would pay direct tax a better tax plan for their businesses.

Let us consider a hypothetical case of a business run by Achieng’, “Nyamulu Beauty  Salon”, in Kariobangi to illustrate this point. With her revenue turnover of Ksh. 100,000 for January 2020, she would enlist for TOT.


Revenue 100 clients @ 1000                  100,000    
Less Cost      
Electricity                    (5,000) VAT +Levies                (901)
supplies (Oils, hair pieces, etc.)                  (30,000)  VAT @16%             (4,800)
Rent for Stall                  (12,000)  Rent Tax @10% Incl             (1,091)
Casual Workers 2@500 a day                  (30,000)    
Mshwari fees[6]                    (5,850)    
County -License                    (1,250)  county license             (1,250)
Operating Trade Profit                    15,900  Total Taxes & Levies             (8,042)


VAT is standard Rated for all goods and services

Operating Trade Profit                    15,900    
Less Turnover Tax                    (3,000)  Total Taxes & Levies          (11,042)
Net Profit                    12,900   11.04%


SCENARIO 2- Personal Income Tax
Trade Profit                    15,900    
PIT -After Relief                        (362)  Total Taxes & Levies             (8,404)
Net Profit                    15,538 Effective Tax Rate 8.4%


SCENARIO 3 Personal Income Tax and VAT Registered[7]
Operating Trade Profit                    15,900    
Add-Input VAT recovered      
Electricity                          664    
Supplies                       4,800    
Net Profit/Taxable Income                    21,364    
PIT -After Relief                    (1,182)  Total Taxes & Levies             (3,760)
Net Profit                    20,182 Effective Tax Rate 3.76%

Scenario 3 encourages small traders to register for VAT which is passed through to consumers; net effect is increased transparency and increased VAT collection for KRA.


Profit                  12,900                   15,538               20,182
Effective Taxes                  11,042                      8,404                  3,760
Effective Taxes% 11.04% 8.4% 3.76%

An alternative tax plan to TOT would give a different result. If we the above scenario described her business, then under scenario one where she paid TOT, her profit  would be Kshs. 12,900. Under scenario two where she pays personal income tax, her profit would be Kshs. 15,538. And if she were registered for VAT and pays also PIT, she would have made profit of Kshs. 20,182.

The individual tax plan would therefore be more favourable to the poor income business groups than the TOT. Notice also that her business has contributed indirectly to the government revenue by more than Ksh. 8, 042. Then if subjected to the TOT of Ksh. 3000, she would have contributed Kshs. 11,042 to the government coffers.

Is it moral that a tax regime erodes business capital of the poor?

The start-up capital of small businesses comes from family resources, this according to McCormick et al. (1997)[8] limits the size of their business, the number of workers they would hire, and the level of profits they would generate. So, they have a limited amount available to reinvest. Mwangi (KNBS 2016) states that licensed micro establishments reported spending 45.3 percent of their net income on investments, either as reinvestment or investing in new businesses and investment in agriculture, while expenditure on household and family needs accounted for 44.5 percent. In 2016, Mwangi notes, small and medium establishments spent significantly high part of their net income on investment at 63.4 and 69.7, percent, respectively.

The erosion of capital from the small business in this manner, will delay their escape from poverty. Rather, allowing them to grow capital would help debunk the notion held by some including ILO (2002)[9] that link micro enterprise sector with poverty, because they earn less on average than those in formal jobs. For, as Watako (2016) found out,  “a significant number of entrepreneurs in the informal sector earn more, on average, than low-skilled workers in the formal sector”.

It is immoral to deny the poor a fair chance to compete in the market by imposing a tax on their businesses.

Governments have used taxes to shut out a section of the economy. Cheeseman, N., & Griffiths, R. (2005)[10] points out that turnover taxes can also be punitive when designed to create a disincentive for buying particular products. They cite the environmental regulations sometimes encourage this practice, taxing people more on purchases harmful to the environment.

Despite the expansive nature of the sector, aiming at bottom end of the pyramid is suspect for this regime that is struggling with a debt burden it is uncreative and evil.  We view TOT as an attempt to cut them from the market. These are the 1.3 million micro and small enterprises in Kenya, which according to a government survey of 2010, employed about 2.4 million people, a whole 17% of the total workforce in Kenya in 2009. They are engaged as follows: close to 2/3 two-thirds 64.1% of all enterprises were in the trade sector. Retailing made up 62% of all trading in Kenya. Manufacturing makes 13% while services 15%  (Watako 2016:207).

It is immoral for the government to burdens but not in equal measure apportion the benefit for the poor. 

In a Liberal democracy, argues Prof. Nicholas Wolterstorff of Yale Divinity School, the state should act impartially when distributing burdens and benefits to its citizens. Our government is absent in the lives of these poor citizens, because of the skewed development priorities. They live in squalor, with children attending overcrowded schools, dismal access to healthcare, main users of public transports on what is left of roads and in need of adequate food. But they now find it expedient to tax these businesses operating in margins of our nation, either in the slums of our cities and towns or the rural areas. Through their businesses they have improved their lot. Watako (2016: 209) illustrates how the micro and small entrepreneurs in Kariobangi influenced the well-being areas, as made up by the basic needs: business operations; access to health care; access to education; access to housing; access to water and sanitation; improved transportation means; increased food and increased incomes.

We can use taxes for good, to even out the inequalities in the society and give essential services for all citizens. Eric Nelson[11] a Harvard professor, explains this idea that the state should coercively maintain an egalitarian distribution of property, because it is the business of the state to engage in the redistribution of wealth through taxation thus make sure the welfare of the poor, and thus the genesis of welfare states in many European countries.

Forcing a blanket tax without regard to the business conditions of payees is reminiscent to the Colonial administration’s Hut and Poll tax of 1920s. Then, the local leaders and representative defended their people against the colonial extortion. Responding to the tax demands, the Luo leaders in Nyanza consulted and convened for a general meeting at Lundha, in Gem on 23 December 1921. About 9000 people attended from all parts of Nyanza to discuss a problem for the first time. They discussed Hut tax. During the meeting Chief Ogada Odera of Gem in Central Nyanza lamented: “As regards our taxes, they used to be sh. 3. Mr John Ainsworth (Nyanza Provincial Commissioner in Kisumu from 1906) told us that the amount would be increased to sh. 5, we agreed. The government then increased to sh. 8. It is very heavy. Besides, we do not want our women taxed.”

Chief Ogada, further made a perceptive comment: “As regards the word colony, the government came here and found us in occupation and now it calls us ‘wasumbni’ (their slaves)”. He was depicting his peoples’ fresh understanding of the changes.

Most commentators on TOT have sided with the government’s position and made a virtue of the extortion of the poor businesses by calling it fair, patriotic, easy to compute and complete. I think they are out of a limb.

There is a general recognition of the high revenue turnover in the informal sector.  “But the government was getting no tax benefit from these businesses,” Kamotho Waiganjo[12] writes,  “… those who operate in the formal sector, and who are therefore in the taxman’s spotlight,… cough up to 30 percent of annual profits as tax,… businesses in the informal sector means that many of the operators in this expansive sector escape the taxman’s dragnet. Not anymore.”

This assumption, that the poor in this sector churn considerable volume of revenue but do not contribute to the tax pool, is erroneous. TOT is an indirect tax on business and not a tax based on income from business profit. The informal sector businesses already pay other indirect taxes, levied on fuel, electricity, VAT on their goods and rent taxes collected from their rents. If they have to pay added tax, shouldn’t they also pay tax out of their business income, which comes under personal income tax regime and not the 30% corporations pay? Shouldn’t their costs of goods, business expenses, and other reliefs also be considered?

Some argue that the cost of compliance is low. It requires little documentation of the taxpayers in this bracket. All they need is a record of their sales. Those paying turnover tax will not need to worry about tracking their expenses, their tax is on turnover. It means that documents of greatest importance for the traders would be one’s showing their turnover.

Now this is putting a stumbling block on a blind man’s path. Keeping proper business records has more benefits to the business owners than just for TOT. Proper records would guide the business owners evaluate their business performance, monitor cost of purchases and sales, creditors and debtors and help in making crucial business decisions. The poor should be advised.

The consequences of eviscerating small businesses would be catastrophic owing to sector’s significance in the economy. It may arouse two major reactions from the poor:

First, if the small businesses scent extortion, they may disappear in thin air. These businesses are supersensitive to extortion by authorities and would hibernate, adjusting their operations till the conditions change. The damage in the wake of their disappearance can be devastating. Mr. Francis Atwoli the Secretary General of Central Organization of Trade Unions (COTU) following his assessment warned that further taxing the small and medium businesses will not only destroy the fastest growing sector of the economy but also render many Kenyans jobless.

A survey by the Kenya National Bureau of Statistics (KNBS) of 2016 shows that approximately 400,000 micro, small and medium enterprises do not celebrate their second birthday. Few reaches their fifth birthday- leading to concerns of sustainability of this vital sector. When pressured, they vanish in thin air.

Second, if the poor business owners interpret this tax as oppression, they will revolt. Implementation of TOT will conjure up the pain of the colonial era. The colonial hut and poll taxes became a heavy burden to the people of Kenya in the 1920s. B A Ogot[13] (2009:772) observes that it made worse by the method of collection which was ruthless and arbitrary. In Nyanza, they collected Hut Tax on all huts in the Kraal, including ‘duol’ and ‘abila’ (cattle sheds). When many people refused to pay these taxes, the colonial authorities including chiefs and tax clerks resorted to brutal methods of collection, ordering policemen chiefs and sub-chiefs to raid villages, set houses on fire, confiscate property or food stuff such as grains, bananas and cassava.

Since TOT will eat into the livelihood of these business owners, they will revolt. But they will crush their revolt, for lack the organisational capacity like that of the UK anti-poll tax groups of 1990. Introducing an unpopular “poll tax” is credited for forcing Mrs. Margaret Thatcher out of office in November 1990.

The green paper of 1986, Paying for Local Government, proposed the poll tax, which charged a fixed tax per adult resident for the services provided in their community, hence the term ‘poll tax’. It was a change from payment based on the worth of one’s house to a resident individual. The tax was, therefore, criticised as being unfair, and needlessly burdensome on those less well-off. What followed were protests and riots that prompted abolishing the tax following the change of the Conservative government November 1990.

What should KRA do with the poorer businesses?

The government and the KRA as the implementing body can act morally and avoid hurting the small-scale businesses. They can make it a priority policy to rationalize the informal sector rather than wipe it out through harsh tax policies. Turnover tax as enacted is elective, for which qualifying small businesses can opt to register for the standard tax system. This move would allow them to be recognised as other businesses. And with sound records, they may take advantage of comprehensive inclusion rules and a reduction process that requires maintaining proof of expenditure. We should make efforts in aiding the small-scale businesses, maintain proper business records and wean them into alternative tax regime.

This government should heed the words of Hubert Humphrey the former USA Vice President, who on the dedication of the Hubert Humphrey Building on November 1, 1977, said: “The moral test of government is how that government treats those who are in the dawn of life, the children; those who are in the twilight of life, the elderly; those who are in the shadows of life, the sick, the needy and the handicapped.”

The tinders are there waiting for something to ignite them. If the poor interprete these as days of extortion, we may as well have ushered in days of revolt.



[2] Mwangi Z. The 2016 National Micro, small and Medium Establishment (MSME) survey. (Kenya National Bureau of Statistics 2016)

[3] De Soto, H. (2000). The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. New York: Basic Books.

[4] Watako S. (2016) Impact of Business Information on Micro and Small enterprises as Agent of Poverty reduction in Kariobangi, UoN. PhD Thesis. 

[5] Kimaru, T. and Jagongo, A (2014). Adoption of Turnover Tax in Kenya: A Snapshot of Small and Medium Enterprises in Gikomba Market, Nairobi Kenya. International Journal of Social Sciences and Entrepreneurship, 3 (1), 18-30. 

[6] Trader uses Mshwari for working capital, interests at 7.5% per month.

[7] Allow Voluntary registration for traders who are below the threshold for compulsory VAT registration.

[8] McCormick, et al. (1997). Growth and Barriers to Growth Among Nairobi’s Small and Medium- Sized Garment Producers. World Development, 25 (7), 1095-1110.

[9] ILO. (2002). Employment, Incomes and Equality: A Strategy for Increasing Productive Employment in Kenya. Geneva: International Labour Organization.

[10] Cheeseman, N., & Griffiths, R. (2005). Increasing Tax Revenue in Sub-Saharan Africa: The Case of Kenya. Oxford Council on Good Governance, Economy Analysis, 6.

[11] Eric Nelson (2011) The Hebrew Republic: Jewish Source and The Transformation of European Political Thought. Harvard University Press 

[12] Kamotho Waiganjo 11th Jan 2020  Standard: There is little harm in more citizens carrying this tough tax burden.

[13] Ogot BA. 2009: A History of the Luo speaking people of Eastern Africa. Kisumu Kenya Anyange press ltd.

Canon Francis Omondi is a priest of All Saints Cathedral Diocese of the Anglican Church Of Kenya. He is also an adjunct lecturer at St. Paul’s University Limuru. Views expressed here are his own.

This article first appeared as Turnover Tax: Days of Extortion, Days of Revolt – The Elephant: