Tax Evasion in the Informal Sector in Kenya: Assessing the Adequacy of the Legal and Regulatory Framework

Abstract

There is a huge potential for revenue in the informal sector and the government can leverage on this to meet its yearly budgetary targets. For many years, the major source of government funding in Kenya has been tax revenue. There is a need to maximize revenue collection from both the formal and the informal sector. The overall objective of this study is to investigate how the use of legal tools and framework facilitates the bringing of the informal sector into the tax bracket and as a result combat tax evasion. The study established that the causes of tax evasion within the informal sector is attributed to: the lack of tax information, high illiteracy levels, poor record keeping, poor management structures, the reluctance in enforcement of the existing legal framework, anticipation of government benefits by the taxpayers and the perception that the government misuses taxpayers’ money.. It is evident that the informal sector portrays a huge potential for widening the tax base. The government needs to formulate and employ strategies of moving the informal sector to the formal sector by facilitating the transitioning of informal businesses. Taxpayer education should be a priority to help change the narrative (the perception of taxpayers within the informal sector) and investing in regulatory framework for purposes of implementation of tax evasion laws alongside investing in digital infrastructure.