Kenya should speed up tax reforms

A World Bank report that found Kenya’s tax system is the most complex in the East African region is worrying. Available data indicate that it takes more than 400 hours for firms to do all the paperwork, including compiling data, calculating, payment and meeting all other tax requirements

This is poor compared to Burundi, Rwanda, Uganda and Tanzania where compliance time is shorter. Considering the world average is 286 hours, Kenya’s tax system is one of the most cumbersome, rendering it an uncompetitive destination for investment and business. While Kenya Revenue Authority (KRA) is pushing forward with reforms, speed is of essence, as the East African Common Market Protocol becomes a reality. If a sense of urgency is not injected into KRA’s reform agenda, Kenya risks becoming less attractive as labour, capital and services move across the five East African states.

While introduction of electronic tax registers and withholding for VAT (Value Added Tax) has succeeded in roping in more taxpayers into the net, the burden these systems place on compliant tax payers is enormous. VAT remains the most complex, cumbersome and time-consuming payment for businesses. Perhaps, this is the time to consider changing the format for filing returns, including an overhaul of the entire Act. While Kenya’s total tax rate has declined to 49.7 per cent, from 50.9 per cent, compliance hours and number of payments remained high.

Public awareness

KRA is piloting electronic filing, a system whose success will, however, depend on an aggressive public awareness campaign as well as an effective feedback mechanism that the tax authority will rely on to gauge its success. But even as the tax authority seeks to reform the system, it must not rush to implement the new format and must ensure it has widely consulted and that it is good enough for the market to avoid a repeat of a crisis that marked introduction of ETRs.

KRA’s reform agenda should be a delicate balance between making it easy for compliant taxpayers to meet their obligations and ensuring that those evading tax are also netted. Even though the tax system has continuously changed, in pursuit of KRA reform, which begun in 1986, severe challenges still remain and must be ironed out.

KRA has been able to achieve collection targets, but against the background of a slow economy, the country’s shift from a low to high tax burden is worrying. Given the high tax burden, there is a danger that KRA may soon find it difficult to collect additional revenue. This is because businesses may delay or evade tax to avoid cash flow problems associated with delays in VAT refunds.

Although withholding of VAT was introduced with the good intention of capturing those charging and collecting VAT, it is a burden to compliant players. Most firms strongly feel that most of their hard earned incomes are taken away by taxes and that the country remains among the most tax unfriendly countries in the world, a position that must be addressed by the Government to encourage business growth.

Tax evasion remains high, especially in the informal sector, which is incidentally the fastest growing segment. KRA must find ways of taxing the informal sector and agriculture. This will ease pressure on other sectors, widen the tax base, and put to rest the perceived view of over taxation.

VAT still has structures that are difficult to administer and comply with and in most cases they are seen as being selective and skewed in favour of those with the ability to run circles round the taxman or law enforcement.

allow flexibility

This must never be the case and the reforms strongly pushed through by KRA must make tax payments easier and friendly to raise the current low compliant levels. Just because KRA’s move is informed by the need to streamline tax payments doesn’t make it right to disrupt businesses account systems.

To help keep tax payment rewarding and meet its ambitious targets, the Government must allow flexibility to encourage voluntary compliance.