Halt your missiles, KRA revenue still impressive despite macro-economic challenges

What keeps Kenya's economy going? In business school, cash, we are taught, keeps businesses running. Starve any business of cash and it suffocates to death.

An import-oriented economy, Kenya's case is unique. To get things done like roads, medicine, laptops for schools and to get workers paid, the collection of tax must be robust and effective. And in spite of the challenges in the macroeconomic environment in the last few years, the Kenya Revenue Authority (which collects all revenue due to the State) has ensured that this lifeline (cash) is not disrupted. Kenya Inc.'s balance sheet has never been this strong.

Collection doubled

Indeed, revenue collection in the Financial Year 2016/17 reached a new record with Sh1.365 trillion collected compared with Sh1.210 trillion collected the previous year or the Sh707.4 billion that was collected in 2011-2012. What this means, is that revenue collection has doubled in a span of five years between 2012 and 2017.

Quite noticeable is that last year's revenue represents the highest growth of tax collection over the previous 3-year period. No doubt, these efforts have boosted Kenya's tax-to-GDP ratio to 19.3 per cent, the second highest in non-oil economies in Africa. Tanzania and Uganda's average in tax compliance and collection is 14.8 per cent which the World Bank considers weak and a threat to fiscal stability.

This impressive record was achieved despite the twists and turns in the operating environment. For to imagine that the role of KRA is remote, disconnected from every day realities is foolhardy. KRA does not operate in a vacuum.

Any variation in GDP or inflation or exchange rate or cargo import affects the revenue collection. For example, a 1 per cent reduction in GDP say for example as a result of rising insecurity, translates to a Sh13.4 billion reduction in revenue.

The multiplier effect is that with less tourists, there is less inflow of dollars, and this pushes up the cost of buying dollars for imports.

Other factors that have had adverse effects on the revenue performance includes non-implementation of tax policy. As a result of which Excise Revenue was lower by Sh4.9 billion.

At the same time, the removal of the tax on essential foods like maize, milk and sugar as a measure to mitigate against drought and famine in April created a Sh4. 6 billion gap in the budget. Meanwhile, the dissolution of Land Control Boards affected stamp duty and the revision of Excise rate costs and delayed PAYE remittances cost the taxman an estimated Sh16 billion.

But most significantly, performance in various sectors as a result of change in policy greatly undermined revenue performance across the economy.

For example, downsizing as a result of firms cutting down on operations resulted in over 7,000 staff lay-offs in various institutions like banks and media houses as firms adopted technology to drive profitability, adversely affecting PAYE performance.

Things were not made any better because overall basic employment growth of 3.2 per cent was below the 4.56 per cent recorded earlier despite GDP growth being higher than the recent past. The lower growth was also compounded by a slackening in the growth of high value employment a key driver of economic growth.

Also, the implementation of the Banking Amendment Act 2016, which capped interest rates hit the profitability of banks and consequently reduced withholding tax on interest payments

Declining profitability among large firms with 16 NSE listed firms issuing profit warnings in 2016 up from 11 in 2015 with an adverse impact on Corporation tax.

Elsewhere, increased financial distress among state firms (including sugar millers, county governments and state corporations) amounted to 65 per cent of total Large Taxpayers Office (LTO) debt. Performance in the manufacturing sector has gone down partly attributed to cheap imports from India and China.

But then KRA hasn't sat by and watched as things move from bad to worse. And so to tackle the potential revenue shortfall, KRA has put in place Revenue Enhancement Initiatives (REI's) built around the enhanced analytical capacity of the iTax system and ongoing initiatives in customs to tackle misdeclaration and undervaluation.

This includes using the data matching power of iTax to identify non-compliant taxpayers and enforce payment among others.

These efforts will no doubt lead to improved revenue collection and thereby boosting the Exchequer.

Ms Njuguna is a Finance and Audit Consultant ([email protected])