James Kituku at his car wash business on Dennis Pritt Road in Nairobi. He seen dwindling number of clients because of the introduction of eTIMS.
For several years now, James Kituku and many of his young colleagues have been running a car wash business on Nairobi's Dennis Pritt Road.
Things have been going well, with dozens of customers, mostly from the corporate world, patronising their business and providing them with a daily income.
But in the past two months, Mr Kituku says it has not been business as usual as company vehicles, which were their biggest clients, have disappeared in favour of established businesses such as fuel stations, where they can be billed in line with current government regulations.
"The company cars that used to come here have disappeared. We see them going to a nearby car wash that has better systems. We used to get up to 20 company cars a day, but now we rely on regular customers and a few taxis," he says.
The move by such businesses is informed by the Kenya Revenue Authority's (KRA) implementation of the Electronic Tax Invoice Management System (eTIMS), which became mandatory on April 1.
Currently, the system requires all companies doing business with other companies to invoice each other through the eTIMS to give the KRA visibility of transactions and ensure that all expenses that buying companies claim to have incurred in their operations have been reconciled with the revenues that selling companies have made.
Mr Kituku represents the vast majority of the tens of thousands of small businesses in the country that are not on the eTIMS system, and who are now being shunned by large companies in favour of established businesses that have systems in place to invoice them through eTIMS so that they can take the expenses into account when calculating taxes.
As a result, businesses such as food vendors who supply businesses, mechanics who service vehicles owned by businesses, plumbers and even electricians who provide services to businesses are finding that they either have to register with eTIMS to continue to have access to their customers' businesses, or lose those customers. Many have not yet done so and have been left with a lost market.
"Now my daily income has dropped from a high of Sh2,500 on a good day to less than Sh1,000 on most days, mainly due to the disappearance of company vehicles," says Mr Kituku, noting that he is seriously considering joining eTIMS to save his livelihood.
eTIMS was introduced by the Finance Act, 2023, which amended the Tax Procedures Act to require all businesses to issue electronic invoices for their operations. Consequently, the KRA announced March 31 as the final deadline for all businesses to be onboarded on eTIMS, which is a transition from the previous Electronic Tax Register (ETR) system, which has been in place since 2005 and is only for businesses registered for Value Added Tax (VAT).
eTIMS now also puts non-VAT registered companies on the KRA's radar.
“It doesn’t matter how big or small the taxpayer is as long as he is facing off with another business entity, then we would need to know who this person is because whatever it is they are supplying to this business entity adds up when it comes to the expenditure and their income tax declaration,” says KRA’s Chief Manager for eTIMS, Hakamba Wangwe.
KRA’s Chief Manager for eTIMS, Hakamba Wangwe.
Target of 915,000
By the March 31, deadline, less than a quarter (202,291) of the 915,000 businesses the KRA had targeted for eTIMS had complied. The KRA admits that its target of 915,000 - based on active business taxpayers on its system - is still far short of the existing 7 million businesses in the country, according to data from the Kenya National Bureau of Statistics (KNBS).
This means that the 212,291 businesses that had signed up to eTIMS by the end of March represented just 3 per cent of the country's existing businesses.
It is a system that could boost Kenya's tax revenues by bringing on board businesses that have not paid taxes for many years and others that have been playing tricks to reduce their tax burden, but industry experts are concerned about the implementation framework, particularly the timelines and the need to ensure business continuity even as the system is being implemented.
But even as the KRA continues with the implementation of the new system, stakeholders in the business community have raised concerns about the impact on businesses, sounding the alarm that many small businesses in particular are facing huge losses.
The apathy has been attributed to several factors, including many business people not understanding what eTIMS is, technological challenges such as internet and feature phone penetration in the country, user challenges and a general fear among small businesses of falling on the KRA's radar.
“There are things that are beyond our control; the internet connectivity in the country stands at about 32 percent. There are three platforms on eTIMS all of which require the internet. Should someone travel from Turkana to Nairobi to get internet connectivity and then go back to conduct business? It can’t work like that. The penetration of feature phones is about 62 per cent and smartphones is about 60 per cent. Can we give people more time so that we don’t punish them for things that are beyond their control,” poses Mr Job Wanjohi, the Chief of Policy and Advocacy at the Kenya Association of Manufacturers (KAM).
Mr Job Wanjohi, the Chief of Policy and Advocacy at the Kenya Association of Manufacturers (KAM).
KRA sticks to its harsh deadline
Stakeholders in various sectors say that if KRA sticks to its harsh deadline and penalty conditions, the impact will be felt across the economy, with large companies that rely on supplies from small players running out of inputs, small businesses that have yet to comply losing markets and the government losing revenue - the main reason for introducing eTIMS.
Ms Wangwe on Thursday told the Nation that “no extension” would be granted, adding that “taxpayers can continue to onboard noting that the legal provisions apply effective 1st Jan 2024. Penalties will apply as per the TPA Sec 86 which outlines a penalty of double the tax in addition to enforcement measures.”
Business-to-business transactions outside the eTIMS system attract a penalty of double the tax due on the transactions carried out, and manufacturers in the agricultural, leather and milling sectors are already crying out that while thousands of their small suppliers remain non-compliant, they have had to stop doing business with them to avoid incurring unnecessary costs.
“Most farmers still do not have eTIMS but KRA has stayed put that it will not allow invoices that have not been electronically generated. Currently, business is not happening between manufacturers and players who have not complied,” Mr Wanjohi told the Nation, noting that one of the big manufacturers in the Agriculture sector was Farmers Choice, which deals with about 5,000 farmers across the country.
From April 1, 2024, the only business expenses that the KRA will consider deductible when businesses file their income tax will be those that are supported by eTIMS.
Before calculating tax
This means that when a business incurs an expense in its operations, the invoice it receives from its supplier must be eTIMS compliant for the KRA to allow the expense to be deducted before calculating tax.
The law also imposes a penalty of double the amount of tax payable if a company conducts a transaction with another company outside of eTIMS.
This has prompted large manufacturers and corporates to implement policies in their operations prohibiting purchases from non-eTIMS compliant suppliers to protect themselves from losses, as they would otherwise have to bear the cost of purchases from non-compliant eTIMS suppliers.
Banks, listed companies and large manufacturers have already implemented policies to ensure that purchases are not made from non-eTIMS-compliant vendors.
Kakamega-based Butali Sugar Mills, for example, last week told thousands of farmers who supply it with sugarcane that from April 1 it would not pay for any deliveries that were not invoiced by farmers using eTIMS.
“With effect from April 1,2024, each farmer is required to issue an e-TIMS invoice for every cane supply/delivery made to the factory. We will be unable to process and pay you for cane delivered unless you as our farmers provides us with a valid Electronic Tax Invoice,” the Miller said in the April 3 circular.
The miller said a series of meetings with KRA officials to find a simpler way that would benefit farmers had been unsuccessful.
Jua kali and agricultural sectors
On the flip side, thousands of small businesses in the jua kali and agricultural sectors that have been off the KRA's radar have lost markets as they are only able to deal with personal customers, a factor that the KRA appreciates
“The sectors that we’ve targeted this time, as opposed to what we’ve been doing before with VAT-registered taxpayers, are new sectors. They’ve never been affected by electronic invoicing.
“When it comes to this new concept, we did expect that we’d have challenges with adoption, but also what has come out very clear is that the sectors are diverse and have different issues,” says Ms Wangwe.
Interviews with representatives of business groups from various sectors reveal that many business people have yet to grasp the essence of eTIMS implementation, which explains the apathy by many businesses.
Other business organisations have been scrambling to politicians' doors, mostly seeking assurances that the KRA will not impose new or additional taxes.
At least two major Nairobi-based business organisations told the Nation that they have a scheduled meeting with Deputy President Rigathi Gachagua, where the eTIMS discussion will be on the agenda. They would not divulge further information, saying they did not want to spoil their chances of getting the DP's ear on the matter.
But Ms Teresiah Njenga, the chairperson of the Mitumba Consortium Association of Kenya (MCAK), told the Nation that most Mitumba traders have been slow to adopt eTIMS due to a lack of clarity, fear that the government may come up with an additional tax and a feeling that the KRA's solution does not meet the needs of the sector.
"They (KRA) have not come down to where the companies are to understand our needs. We also want to understand what they want and why we need this Etims," said Ms Njenga.
Civic education
Some traders admit that the KRA has been heavily involved in civic education in recent weeks, as most businesses do not understand the system or its purpose.
"Many business people still don't understand this thing. There's still a perception that it's a new tax. Many businesses here are not established, they sell without receipts," said a representative of timber traders at Gikomba market.
Ms Wangwe, who heads eTIMS at the KRA, insists that the authority will not grant another "blanket extension" of the deadline, saying the approach now is to address sector-specific issues and have "visibility of transactions right (down) to the grassroots".
Ms Wangwe, heading eTIMS at KRA, insists KRA will not provide another “blanket extension” of the deadline, saying the approach now is to address sector-specific issues and have “visibility of transactions right to the grassroots.”
“As we move forward we are looking at introducing enforcement measures. We’d be looking forward to you complying, but then in the event that is absent then we’d like to see what further enforcement measures we’d have to put in, to bring in the numbers we were looking forward to.
“The field enforcement teams on the ground are tasked with the task of monitoring compliance and enforcement for non-compliance cases,” Ms Wangwe said.
She said the KRA was rolling out various solutions to "meet taxpayers at their point of need".
