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KRA pounces on high-end barbershops, beauty parlours

Times Tower in Nairobi, the headquarters of Kenya Revenue Authority (KRA). FILE PHOTO | DENNIS ONSONGO | NMG

The Kenya Revenue Authority (KRA) is hunting down barbers, high-end beauty parlours and taxi drivers as it eyes a share of the billions of shillings changing hands in the informal sector, which has for long eluded the taxman’s dragnet.

A number of attendants in the high-end barbershops and beauty parlours in Nairobi told the nation that they have started paying the 16 percent value-added tax (VAT) on their sales while their employers have been cornered by tax officials to deduct and withhold five percent of the commissions and remit to the KRA. They will then be required to file the rest to the KRA at the end of the year.

To penetrate the industry, the taxman has been dispatching its army of revenue officers, disguised as customers, to notable beauty parlours to get pedicure and manicure services while collecting intelligence on their operations before pouncing.

The taxman is reportedly hitting all daily transactions with the 16 percent VAT while the commission earned by the independent contractors, including barbers, hair stylists and other attendants without an employment contract, are being slapped with a five percent withholding tax.

Sam, a barber in one of the high-end barbershops in Kileleshwa, is still reeling in shock after the owner of the enterprise, with whom he shares the money he earns from shaving heads, started to withhold five percent late last year.

“You know for us we get paid on commission. Now my boss has been forced to deduct five percent (from this commission), which I find very unfair,” said the barber, who only allowed us to use his first name for this story.

However, because withholding tax for resident taxpayers is not a final tax, Sam can still claim it when paying for income tax at the end of the year, said Everlyne Makokha, a supervisor from the Domestic Tax Department.

The owners of such establishments will require the barbers who are paid on commission to give them a PIN.

“This attendant is expected to go to iTax and file an individual income tax return,” said Ms Makokha.

“When you get that amount that you are supposed to pay, let us say it comes to Sh600,000 as gross tax that you are supposed to pay. But remember, there is withholding tax that you have already sent directly to the KRA so that comes as a credit to that person.”

Operators of taxi-hailing apps are also paying 16 percent VAT on the commission as retained by the owners of the platforms such as Uber and Bolt.

Taxi-hailing cabs, including the San Francisco-based company firm Uber, reduced its commission from 29 percent to 18 percent but started charging the drivers on their platforms a 16 percent VAT.

“They started last year when they did away with the booking fee of 11 percent,” said Digital Taxis Association chairman David Muteru.

This means that for a ride of Sh1,000, Uber will take Sh180 as commission plus VAT on the commission of Sh28.8, bringing the total retained by the technology provider to Sh208.8.

Content monetisation, another booming sector, has since been hit with a five percent withholding tax, which targets people with irregular income such as contractors.

But it is on the mushrooming high-end barber shops that have benefited from the sudden obsession with grooming and personal care by the middle class that the KRA has trained its guns.

Along Koinange Street in Nairobi’s central business district (CBD) is a beauty parlour where dozens of young men and women hire a table to offer manicure and pedicure services.

One of the young men who hires a table in the establishment told the nation that, unbeknown to them, the KRA officials had been visiting them incognito as customers.

KRA is hunting down barbers, high-end beauty parlours and taxi drivers. PHOTO | SHUTTERSTOCK

These officials were able to establish the prices by getting the services themselves.

They were also able to count the number of people that would be served on all the tables in a month.

Finally, they went to the owner of the establishment demanding to see the books.

“We have been having a back-and-forth with the KRA people. We know for sure that we will start paying taxes,” said one of the contractors.

In a beauty parlour along Ngong Road, a withholding tax certificate seen by the nation shows that the KRA withheld Sh6,092 from the commissions earned by one of the independent contractors.

The contractor, who asked us not to reveal her name, received a total of Sh121,832 for her services. Because the owner gets 60 percent of the total income while she retains the remaining 40 percent, it means that in January, a month when business is generally low, she generated Sh362,595.

She disclosed that in a good month, like December, she can earn double what she received in January.

The taxman first deducted a sales tax, or VAT, of 16 percent of the Sh362,595, which left the business with about Sh304,580. The owner of the enterprise took Sh182,748, leaving her with consultancy fees of Sh121,832 which the KRA subjected to five percent withholding tax.

Her take-home in January was thus Sh115,740, a decent earning for a country whose average monthly income is Sh20,123, according to official data.

“At first we tried to resist but we saw that clearly, we were fighting a losing battle,” said the contractor.

The government has been using withholding tax as a dipstick for measuring the value of transactions in industries that had been out of reach of the taxman’s dragnet, including farming where there are plans to introduce a five percent final withholding tax on produce delivered to co-operative societies and factories.

Statista, a leading statistics database, projects that $2.3 billion (Sh325.5 billion) -- about 2.4 percent of the size of the gross domestic product (GDP) -- will be generated from Kenya’s beauty and personal care industry.

The largest segment within this market, according to Statista’s estimates, is personal care, with a market volume of Sh169.8 billion ($1.21billion).

In the Finance Bill 2023, the government had sought to introduce a five percent excise duty on human hair, eyelashes, switches and artificial nails in a move that would have seen the prices of these beauty products go up.

The proposals, together with that of increasing excise stamps on beauty and cosmetic products, have since been shelved.

Sam, the Kileleshwa barber, reckoned that the five percent tax is unfair because he incurs a lot of operating expenses, which he estimated at around to around Sh22,000, which do not go into the books. On average, he said, he makes between Sh60,000 and Sh65,000 in a month shaving people's heads.

Some of his expenses include transport to and from work. He also has to eat. Then there is the cost of buying products and machines.

“That is why we are wondering if you have already spent Sh22,000 then you deduct five percent from my earnings, what kind of work are we doing surely,” said Sam.