Small businesses are the main source of income for households across Africa outside agriculture but contribute a modest fraction of tax revenue. Around two-thirds of African countries operate simplified tax regimes (STRs) for small businesses – typically turnover or presumptive taxes designed to provide an accessible ‘on-ramp’ into the tax system. Their design varies – 40 per cent apply a minimum exemption threshold; 60 per cent use a percentage of turnover; the rest use set fees or a combination, and the implicit tax burden ranges from light to heavier than the standard corporate regime.
These design choices embody a three-way trade-off. Liabilities tailored to each business (a percentage of turnover) are more equitable but harder to comply with and administer. A uniform set fee is simple but regressive. A high exemption threshold protects small firms but shrinks the tax base. The level of the rate itself shapes incentives to formalise, under-declare, or graduate to the standard regime.
Kenya has around 7 million small businesses, yet its turnover tax (TOT) raises less than 0.1 per cent of total tax revenue. The regime has changed repeatedly: reintroduced in January 2020 at 3 per cent, cut to 1 per cent during the pandemic, raised to 3 per cent in July 2023, and halved to 1.5 per cent in March 2024, with eligibility currently spanning KSh (Kenyan shillings)1–25 million (about US$8,000–200,000) in annual turnover.
Our study combines a decade of Kenya Revenue Authority (KRA) records with two surveys of small businesses, two randomised experiments each covering over 10,000 taxpayers, and event studies of the 2023 and 2024 rate reforms.
