The Grim Reaper of Startups In Kenya: Unfair Taxation

by Business Watch Team

I came across a story where the Kenya Revenue Authority (KRA), had slapped a Kenyan startup, PesaPal, with 233 million shillings in taxes. The story claimed that PesPal had “lost” its appeal before the tax appeal tribunal.

My focus was not actually on the story but on the amount being claimed by the taxman and whether the business will be able to pay that kind of money in the event KRA decided that the amount is needed as soon as yesterday.

This is not the first time KRA is demanding such huge amounts from businesses. It is not a crime. It is their mandate. But we have witnessed businesses such as Keroche Breweries being shut down because they are unable to pay the amounts demanded by KRA in taxes.

Is the same likely to happen to PesaPal? Have we ever stopped and asked ourselves about the real impact of unfair taxation on startups in Kenya? For a country struggling with the highest unemployment rate in East Africa, killings startups should be something unheard of. But here we are.

The truth is that startups are the lifeblood of any thriving economy, injecting innovation, employment opportunities, and economic growth.

In Kenya, a vibrant entrepreneurial spirit exists, with talented individuals striving to transform their ideas into successful businesses. However, a persistent issue is slowly suffocating these budding enterprises—unfair taxation.

The burden placed on startups by the Kenyan tax system is hindering their growth, stifling their potential, and, ultimately, killing their chances of success.

Kenya’s tax compliance requirements can be overwhelming, particularly for startups operating on tight budgets and limited resources. The administrative burden of tax registration, filing returns, and maintaining meticulous records can divert valuable time and resources away from core business activities.

Startups end up spending significant energy navigating complex tax laws, preventing them from focusing on crucial aspects such as product development, market penetration, and customer acquisition.

Something that many policymakers fail to understand is that startups, especially those in their early stages, often struggle to generate substantial profits due to the need for investment in research and development, marketing, and expansion.

Imposing a high tax burden on these nascent enterprises discourages growth, deters potential investors, and forces them to channel limited resources away from critical areas of development.

Incentivizing startups is essential to foster an environment conducive to their growth. Unfortunately, Kenya’s tax system lacks sufficient provisions to encourage and support startups. While some tax incentives are available, such as a reduced corporate tax rate of 15 percent for companies listed on the Nairobi Securities Exchange’s Growth Enterprise Market Segment (GEMS), the eligibility criteria are restrictive, leaving many startups unable to benefit.

The issue of double taxation poses a significant hurdle for startups in Kenya. Many entrepreneurs face the burdensome challenge of paying multiple taxes on the same income, undermining their profitability and hindering growth.

At the same time, Value Added Tax (VAT) regulations can be complex and unclear, especially for startups operating in the digital economy. These ambiguities can lead to tax disputes and penalties, further draining the already limited resources of young enterprises.

Unfair taxation is silently wreaking havoc on the startup ecosystem in Kenya, snuffing out the potential of these enterprises before they can fully flourish. Burdening startups with excessive compliance requirements, high corporate tax rates, and limited incentives, the current tax system is stifling innovation and impeding economic growth.

Policymakers must recognize the critical role startups play in creating jobs and driving economic progress and take immediate steps to reform the tax system.

Read Also: Kenyan Companies Are Feeling The Heat Of Tax Burdens

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