Goal too far? Missed tax target slows Ruto's economic plan

Financial Standard
By Brian Ngugi | Feb 20, 2024
KRA offices at Times Tower, Nairobi. [Wilberforce Okwiri, Standard]

The taxman missed its targets by nearly Sh100 billion in the five-month period to November 2023, dealing a blow to the government’s revenue and development plans.

The National Treasury revealed last week that ordinary revenue for the period was Sh878.9 billion against a target of Sh977.1 billion.

This was a shortfall of Sh98.2 billion, despite recording a growth of 11.7 per cent.

“All broad tax categories of ordinary revenue save for value-added tax (VAT) fell short of the respective targets during the review period,” said  Treasury.

“Income tax recorded a shortfall of Sh76.6 billion, excise taxes of Sh17.1 billion and import duty of Sh12.6 billion.”

However, VAT and other revenue were above target by Sh2.2 billion and Sh12.0 billion, said the Treasury.

This is the latest cycle of disappointing tax revenues and comes at a time when the controversial revenue plan proposed by President William Ruto has not yet gained traction, with tax collection in both the previous and current fiscal years having fallen short of the government’s target.

This deals a major blow to the President’s efforts to fund his costly campaign promises and repay mounting public debt.

The platform on which his government was elected aimed at uplifting low-income earners, commonly referred to as hustlers.

It will cost up to Sh2.7 trillion for Ruto’s administration to implement its rosy promises over the next five years, a previous report showed.

The Sh2.67 trillion is the total war chest required over five years by the new administration with the first year requiring Sh473 billion, about a fifth of the total amount, according to a report by budget experts from Parliament.

The monumental cost of funding the Bottom-up Economic Transformation Agenda has hit home at a time when the government faces narrowing fiscal space to roll out its policies, amid high debt repayment obligations.

Nairobi-based economic analyst Deepak Dave of Autonomi Capital says the tax underperformance is not unexpected in a slowing economy.

“The recent scramble to tax everything everywhere all at once is backfiring; businesses are so tangled in rules they are not being competitive,” he said.

“The government should finally announce a thorough clearing of the tangled taxation system to allow employment to grow and business to thrive.

“The sad alternative to all this is hoping for more miracle loans from the West, that will simply push us further into long-term debt though it will help short-term exchange rate issues.”

Kenya Revenue Authority (KRA) has faced significant pressure from the Ruto administration to address revenue leakage and enhance the financial resources of the State, to allow the Treasury to reduce its dependence on public debt.

Global lenders such as the International Monetary Fund (IMF) and the World Bank have been pushing the government to raise taxes.

Ruto has implemented a set of contentious taxes, including a 100 per cent increase in value-added tax on fuel to 16 per cent, and a 1.5 per cent levy on salaries to finance the construction of affordable housing, which was recently suspended by the court.

The government anticipates that these measures will generate an additional Sh200 billion annually.

KRA earlier disclosed challenges to collect taxes from the informal economy such as traders, small shops, and other businesses that have long evaded the attention of the taxman.

Informal economy

During an appearance before the National Assembly Finance Committee last year, KRA Commissioner General Humphrey Wattanga outlined the difficulty of taxing the informal economy even as he predicted the corporate sector could also experience a hit.

In the informal economy, Mr Wattanga cited the obscure nature of businesses and the absence of transparency in their financial transactions as major obstacles.

“Taxing the informal sector firms remains a challenge mainly due to the high administrative costs incurred by tax authorities, lack of financial statements by the enterprises and a large number of unregistered enterprises,” he said.

KRA’s admission aligned with a documented decline in tax compliance, indicating a potential transition towards an underground economy.

A spot check by The Standard earlier revealed that a group of traders have resorted to abandoning electronic payment methods to evade tax.

KRA relies on the monitoring of transactions conducted through electronic or formal payments to obtain information regarding financial transactions with banks and other institutions.

KRA reckons this data can be analysed through algorithms to generate taxpayer risk profiles and improve compliance.

It plans to integrate its systems with telcos, commercial banks and Central Bank of Kenya (CBK) to gain a comprehensive perspective on all traders’ transactions.

Newly deployed Revenue Service Assistants are also expected to help enforce compliance by conducting field operations and gathering data to assist in expanding the tax base.

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