The 2015-16 fiscal year has been characterised by a challenging macroeconomic environment. This has seen Kenya’s GDP growth downgraded by the Treasury, International Monetary Fund and World Bank from 6.9 per cent, 6 per cent and 6.9 per cent — to 6 per cent, 5.4 per cent and 5.6 per cent, respectively.
But the growth projections for 2015-16 were a bit ambitious, and appear to have been based on the projected impact of the Government’s spending on infrastructure. However, during the year, policy makers and other observers have realised that the projected growth is unattainable.
This is mainly due to a tough operating macro-economic environment, characterised by high interest rates and the depreciation of the shilling, hence the revisions.
Bulk of employment
The slow economic growth is further buttressed by recent Treasury reports indicating the Kenya Revenue Authority (KRA) missed its half-year tax collections target by over Sh47 billion, which signals a possible widening of the Budget deficit, with far-reaching consequences on economic growth.
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It is against this backdrop that economic analysts have warned of likely tax increases to finance the Budget as the Government runs out of affordable borrowing options, both locally and from the international markets.
According to this school of thinkers, the Treasury appears to have no option but to increase the national tax base. It is worth noting that the Kenyan tax base to GDP ratio is still very low.
Notwithstanding that most large taxpayers in Kenya are compliant, KRA has been known to focus on these players with regard to its revenue collection. However, this focus seems not to be working, if the revenue shortfall is anything to go by.
Therefore, the Government should consider other measures to plug the deficit, rather than increase the tax burden.
One solution is enhancing tax compliance in untaxed sectors of the economy, such as the informal sector.
In Kenya, the informal sector was initially associated with manufacturing. However, it has since grown to include trading activities as well as service businesses. According to the Economic Survey 2015, the informal sector in Kenya makes up the majority of business enterprises and accounts for the bulk of employment in Kenya. However, the sector does not contribute the bulk of Government revenue collections.
The sector is plagued by conscious and non-conscious tax evasion, generally driven by a perception that the tax burden is too high as a percentage of profit or turnover.
Other obstacles
Some of the other obstacles to taxing the informal sector include the fact that small businesses are inconspicuous to tax administration, operations are largely cash businesses with inadequate accounting records and audit trails, and online tax systems are complex, with limited resources and technical capacity among operators.
If the informal sector remains untaxed, the Government will continue experiencing revenue shortfalls as more people move into this sector.
Therefore, to improve revenue collections, KRA should consider engaging sector players on a regular basis to enhance compliance, particularly on turnover tax. Its introduction was geared towards bringing the informal sector into the net by simplifying tax procedures, computations and record keeping.
Further, KRA could undertake tailored trainings for players on the importance of book keeping and operations of the online tax system. This would enhance the sector’s production capacity and in turn drive economic growth, resulting in increased revenue collections.
Going forward, even as the Treasury explores ways of enhancing its revenues, it is imperative that the Government trim its ballooning Budget and current account deficits to steady the economy.
The writer is an assistant manager with PwC Kenya’s tax practice.
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