Informal trade deals blow to EAC revenue collectors

Business Daily Africa, September 17, 2010

Technology-savvy youths are increasingly taking to informal cross-border trade, dashing hopes of tax agencies to grow their collection with rising trade volumes, a new study says.

A study by CUTS International indicates that high level unemployment and residual barriers on movement of goods and services across East Africa Community borders are pushing millions of enlightened people into informal trade as the region evolves into a common market.

Majority of the perpetrators are young people aged between 20 and 40 years, 10 per cent of who hold university degrees, 25.8 per cent diploma or professional certificates, while 44.2 per cent are secondary school leavers.

“This trend indicates that as the stage of regional integration rises, informal cross border trade is also becoming an increasingly sophisticated affair that requires better education to run,” said Victor Ogalo, a regional programmes officer at CUTS International.

Involvement of the group is raising concern that tax agencies could be losing millions of shillings in tariff evasion even as they step up information sharing. In Kenya, the volume of trade with neighbours has been growing steadily over the last five years since the region started implementing a custom union in 2005.

Trade ministry data indicates that Kenya’s export into the region grew from Sh53 billion in 2006 to Sh90.5 billion last year. This reported trade level, however, does not include products worth billions of shillings that are exchanged across national borders informally.

Colossal sum

The size of the informal sector is currently estimated at 41 per cent of the country’s 1.4 trillion GDP (Sh594 billion), a colossal sum that policy makers have been struggling to bring under the tax net. While the government has introduced turnover tax in the hope of bringing most of this wealth into the tax bracket, experts say more need to be done.

The turnover tax targets any enterprise that records at least Sh5 million in annual turnover. The government faces the challenge of ascertaining firms’ earnings as most players in the informal segment hardly keep financial records.

“This segment is usually very diverse and mobile, making it difficult for government to enforce tax laws,” said Nikhil Hira, a tax partner at regional consultancy firm Deloitte and Touché. He attributes the growing number of youthful Kenyans going into informal trade to the teething problems that usually follow regional economic integrations.

“We could be in a common market, but traders still face work permits, domestic taxes, and conflicting regulations that make formal market access difficult to penetrate,” he said.

This news can also be viewed at: