Why your taxes will never come down

Kenya Revenue Authority Commissioner General John Njiraini

Early this month, a container landed at the Port of Mombasa from Britain with cargo that could explain the mystery surrounding the 40 overnight billionaires and 40 million, heavily-taxed paupers.

Two high end sport utility vehicles or SUVs, specifically 2014 Range Rover Sport silver in colour, were to begin the final part of their journey on land to their owners – supposedly in Uganda.

But documents accompanying the vehicles showed the cargo as toys, which kids from Ugandan families could inadvertently be waiting for. “It was only by chance that we caught this,” Kenya Revenue Authority (KRA) boss John Njiraini said, explaining that it was not the norm to inspect transit cargo.

It (cargo) does not belong to us so we have no business checking what is in it, he went on in a chat with business journalists.

A non-intrusive cargo scan performed on the container using newly upgraded machines had revealed that there were actually one or two toys, household furniture and mattresses that were used to disguise the real cargo whose real value would be anywhere above Sh30 million.

As we would learn in interviews with other stakeholders, this was not nearly an isolated incident. Thousands of top of the range vehicles are illegally imported into the country every year, under the guise of being transit cargo destined for the landlocked neighbours, according to importers themselves.

Charles Munyori, the secretary general of the Kenya Auto Bazaar Association (Kaba)– a lobby for car importers and traders, told Business Beat that the diversion of transit cars had actually taken a nose-dive in the last three years.

“It happens all the time, but we think the problem is within control,” Munyori said of the illegal entry of used cars into the market. Until late 2011, Kenya had a single registration regime for cars, motor cycles and agricultural and construction equipment. For fraudsters, it made sense to buy a motor cycle, have it registered and use its registration plates on a vehicle that had been diverted from transit.

For about Sh80,000 spent to buy the motorcycle, a Range Rover would for instance be deemed as duly registered in Kenya using fake number plates. “It is highly probable that such plate would be affixed to a Mercedes Benz or another top end car,” Munyori added, citing that such vehicles would often deflect any suspicion while their owners happen to be the influential in society.

Collusion with officials

Savings on taxes for the importer could be over Sh7 million and an equivalent size of hole in the country’s revenues which would be plugged, somehow. There is no limit to how such deprived motor cycles could be used, including resale as whole or spare parts.

Mr Njiraini and his staff are convinced that the identical five-litre engine vehicles netted were actually destined for Kenya and would have been diverted anywhere along the 1000km-long road linking Mombasa and the border crossing points into Uganda.

And there is reason to believe so. Had the cars been destined for Uganda, the lie is that the fake cargo declaration could only live until the exit points of either Malaba or more probable, the busier Busia crossing. It is procedural for custom officers to inspect cargo entering the respective country, including opening up the containers to ascertain the quality, quantity and value of the imports.

In the likely case that the cars, which have since been detained, were intended to be diverted into the country, KRA would have lost more than Sh15 million in Import duty, Excise duty, Value Added Taxes and Import Declaration Fees.

That container was only one among hundreds or even thousands that leave the coastal town of Mombasa every day destined for Uganda, Rwanda, Burundi and South Sudan. Unfortunately, and in Njiraini own admission, a significant number could be ending up in Kenya. Importers would in such cases cover their tracks by transporting the seals used to track the containers to the border points, and make fictitious entries that the cargo had actually arrived, cleared and handed over across the border.

Obviously, collusion with customs officials is necessary to ensure the fraud is executed. But the problem is much bigger extending to cereals, sugar, mitumba (second-hand clothes) and even edible oils. “It is a very tough job,” Njiraini said of his agency’s mandate, which is to collect revenues on behalf of the government.

But despite the challenge faced by KRA, importers have eqully a bone to pick with the taxman. KRA officials are usually accused of creating many barriers in the name of ensuring what is being declared was genuine. This tends to force taxpayers into bribing the KRA staff besides cultivating the trend of avoiding to pay tax as a form of getting return for the penny shared with corrupt officials.

This year has specifically been a tough one for KRA when put up against the record targets set by the parent ministry, the National Treasury. Huge spend on infrastructure projects such as roads means every single cent that can be recovered from taxation could go a long way. But tax leakage stemming from crimes such as cargo diversion has ensured a revenue collection shortfall of Sh11.4 billion in Customs department in the year to October, 2015.

KRA has also reported another more significant revenue shortfall of Sh27 billion from domestic tax with sharp declines of corporation taxes. A difficult operating environment has been blamed for the slump in profits reported by companies, even though many are currently in court fighting with KRA over claims of tax evasion.

Collectively, the missed revenue target is just under Sh40 billion, which has, however, been factored in this year’s budget. Pressure has piled on KRA relating to the revenue shortfalls, especially at the height of a month-long teachers strike where the State held that there were no resources to settle the pay raise earlier awarded by the Industrial Court.

Njiraini acknowledges that there was little else that could have been done to raise more funds. Considering that the funding hole must be filled and someone has to pay for it, now or later, it is the poorer in the society that bear a heavier burden by ceding more of their meager earnings to the State. Well, aware that costlier basic commodities mean some households could go to sleep on an empty stomach.

Already, the State has introduced punitive consumption taxes through the Excise Duty Act whose impact will be felt through costlier basic commodities, as soda, water, low-end cigarettes and beer. Fears are rife that raising taxes of low-end beer could have deadly results including pushing consumers back to unhealthy and dangerous alcoholic drinks.

Higher tax rates do not always translate to an increase in revenue collection, as was the case three years ago when the State reintroduced excise duty on un-malted beer, widely known as keg. Consumption fell to a such low level that the manufacturer was on the verge of discontinuing production. The outcome was devastating for the entire supply chain, starting with the sorghum farmers to pub owners.

The State was forced to reverse the directive on taxation of keg, much to the relief of thousands of alcohol consumers and the manufacturer, East Africa Breweries. But in the recent months, the revenue shortfall has hit the taxman forcing the National Treasury to borrow heavily as a stop-gap measure that also saw interest rates shoot through the roof. Nothing quite told the state of affairs like the conditions that the government was able to borrow the funds at, paying a premium interest rate of over 22 per cent for short term credit on Treasury bills.

The higher taxes on basic commodities is expected to be a longer term strategy to raise funds and is estimated to bring in an additional Sh28 billion in the current financial year that ends June 30, 2016. At the end, it is the poorer majority that will continue to shoulder the cost of running the government operations, while the wealthier hatch schemes such as diverting high end cars into the country – to be driven on roads built with funds from taxing keg.