When you are taxed out of a business

Some challenges budding entrepreneurs face include high taxes, high cost of electricity, poor roads, and insecurity. 

Photo credit: File | Fotosearch

What you need to know:

  • Some challenges budding entrepreneurs face include high taxes, high cost of electricity, poor roads, and insecurity. 
  • A disappointed entrepreneur says "It is by design and not by default that businesses are dying and poverty increasing."

When 28-year-old Marvin Iraki launched his water refilling business in Ngong Town some two years ago, he was sure that this was the business that would catapult him into the next big thing in Kajiado County.

He had a borehole where he sourced water for purification. He had also identified a decent shop that could get him, immediate customers, as it was located in a densely populated area, and so for him, every factor pointed to a successful venture.

Little did he know that the State, which swore to support young entrepreneurs like himself thrive, would be his biggest setback.

At the beginning of his venture, Mr Iraki paid a county single permit license fee of Sh18,500, public health license and testing fee of Sh13,000, a Nema license fee of Sh33,000 and a Kebs certification fee of Sh31,350.

On top of that, he would, as a devoted citizen, pay monthly turnover tax of 0.5 per cent as well as Sh5.47 excise for every litre of water sold. Surely, he thought, that was enough to make him a legitimate business. But not so according to the taxman.

“When I launched my water refilling and packaging business, I had done my math and knew for sure that it was going to be a profitable venture. And it was doing fine, until the taxman came knocking,” Mr Iraki told Powering SMEs.

He would further be required to pay a KRA custom excise license fee of Sh50,000 and KRA custom excise bond of Sh300,000. That was not all. He would also be required to pay KRA a minimum of Sh50,000 for custom excise stamp, and a mandatory independent testing lab and MoU fee of Sh15,000 in order to qualify as a legitimate business.

He was determined to prosper and so he took a loan from a bank just to be able to cover these levies. However, even after meeting the stipulated threshold for running a legitimate water refilling and packaging business, he would be harassed by county officials with the audacity to ask for extra payment and fault him if he did not meet their demands.

Mr Iraki found himself in a dilemma. He was torn between continuing with a business that did nothing but frustrate him to keep his five young employees on the payroll or close down and try something else.

His business was making no profit. It only seemed to be enriching someone else, and so eventually he decided to close shop.

High taxation

What started out as a highly promising venture that could create a livelihood, not just for him, but for several other young people within the local community, was ultimately forced to shut down, all because of a high taxation policy that seemed hell-bent at making sure that the business would not succeed.

Mr Iraki’s story paints a picture of what several other budding entrepreneurs across the country go through when it comes to setting up a business. If it is not the high taxes, then it is the high cost of electricity, poor roads or insecurity.

This has left them wondering whether the government that promised to enrich them when seeking their vote still has their interests in mind, and especially during these difficult times of the Covid-19 pandemic when extensive graft has been reported in the news.

“The system has been set in such a way that you can only succeed in business through corruption or going against the law. It is almost impossible to follow the right path and succeed. It is by design and not by default that businesses are dying and poverty increasing,” said a disappointed Mr Iraki.

He is not alone.

Last month, Ms Faith Mutembei went on social media to explain to her customers why the Mountain Brooke water brand will no longer be in the market, pushed by similar circumstances as Mr Iraki.

“I must confess that initially, I did not have an answer, rather I was too depressed to even talk about it publicly. Perhaps, this explains why you will no longer see Mountain Brooke drinking water on your favourite supermarket counters. This is how punitive doing business in Kenya is,” she said as she went ahead to list the taxes, licences and permit fees that had pushed the brand out of business.

In most instances, water-packaging businesses are also required to pay annual advertising license fees for any branding on premises or vehicles.

Those that operate in more than one county have an even greater financial burden, as they are required to pay for a different distribution as well as a public health license in every county they operate in. Some counties have been known to charge up to Sh50,000 for a distribution permit alone.

For these reasons, many companies have resorted to cutting down on costs of operation either by downsizing to cut staff costs, or changing business models from packaging to onsite refill. Even though this approach reduces their profit margins, at least it enables them to reduce the money they would spend in purchasing the machines for packaging, which can be quite expensive.

Yet others have resorted to operating in a single county so as to reduce the burden of inter-county fees. Most water packaging and refilling businesses have eventually resorted to passing on their costs of operation to the consumer. Hence a half-litre water bottle retails at Sh20. Mr Iraki says part of the reason smaller water packagers are harassed is because the State wants to reduce the circulation of manually bottled water, which has higher chances of contamination compared to water supplied by larger companies that use sophisticated machines to run operations in place of human labour.

“I tend to suspect that the reason why they harass the small-time water packaging companies is because they want only the big boys to remain in operation. Whether there are vested interests in this or whether it is because of health concerns as they say, I don’t know,” said Mr Iraki.

He, however, argues that the health concern may not be accurate, as he narrates of an incident where a health official claimed after testing, that a sample of his water was contaminated with deadly bacteria, only for him to take a similar sample for testing at the University of Nairobi and to discover that it was free from any contamination.

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