Kenya Revenue Authority (KRA) targets to generate adequate revenue for the Government without resulting in budget deficits.
The big question is, how? This question is particularly relevant ahead of this week’s national budget speech. Funding a budget of over Sh3 trillion is a huge ask and resorting to borrowing and grants can only get us so far. In fact, KRA targets to collect Sh1.7 trillion in the 2018/19 financial year.
One of the core challenges for the KRA is the persistent focus on the same set of taxpayers. At least 70 per cent of its revenue comes from Pay as You Earn (Paye) and large corporate taxpayers. This is the same set of taxpayers that KRA targets for audits because any incident of non-compliance established is likely to produce significant tax revenue.
For KRA to meet its collection targets, it has to employ non-conventional measures. This calls for either deepening or expanding the current tax base. Deepening of the tax base entails imposing additional taxes or higher rates of tax on the same people. On the other hand, expanding the tax base entails bringing more people and income into the tax net.
In recent years, we have witnessed a deepening in the country’s tax base. For instance, the Income Tax Bill, 2018, proposes to introduce a higher tax rate of 35 per cent. According to the Tax Foundation (2017), the worldwide average statutory corporate income tax rate is 22.96 per cent (Africa’s is 28.2 per cent). As such, Kenya’s newly proposed rate is relatively higher by comparison.
Further, the Tax Laws Amendments Bill, 2018, proposes to tax items that are currently exempt or zero-rated for VAT (value added tax) purposes.
Exemption or charging 16 per cent VAT on supplies that are currently zero-rated will be costly to consumers. As much as these changes will reduce tax refunds and increase tax revenue, they will make some essential supplies less affordable and generally unavailable to the ordinary mwananchi.
Deepening of the tax base is, therefore, likely to affect the country’s competitiveness as an investment destination and regional hub.
To this end, KRA’s most viable option would be expanding the tax base beyond the current bucket of taxpayers.
In the recent past, the taxman has instituted various measures. These include employment of technology to ease tax administration, the introduction of more customer-centric approaches, clamping down on counterfeit products as well as the introduction of new taxes.
In the technology space, KRA introduced iTax to offer integrated online services to customers.
The authority also rolled out the Integrated Customs Management System to foster faster clearance of goods at the Mombasa port and streamline customs processes. In addition, we now have enhanced ease of processing payments through the use of mobile money platforms and integration of iTax to most commercial banks’ systems.
Adoption of technology has, however, encountered numerous challenges. These include limited access to the Internet due to either limited coverage or affordability. Some of the systems launched are unstable while maintenance of data integrity during systems transition has been a challenge.
Secondly, KRA has improved its customer service over the years. It has been providing information on the social importance of paying taxes as well as offering technical training. In addition, the authority has embraced alternative dispute resolution mechanisms that are more customer-focused and have to date unlocked at least Sh8 billion.
The proliferation of counterfeit products has created fears within the business community. Indeed, the trade in counterfeit products is said to be one of the factors behind KRA’s consistent failure to meet its targets.
Reportedly, KRA has stepped up its fight against such products, especially on illicit alcoholic beverages.
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However, a lot more needs be done to clamp down on manufacturers and traders of such products whose quality cannot be ascertained.
Additionally, the Income Tax Bill, 2018, proposes the introduction of the presumptive tax. While the move seeks to cast the net wider to capture the ever-elusive informal sector, questions have, however, been raised as regards service delivery to taxpayers within the sector to warrant the imposition of additional taxes.
In addition to the measures already taken, we believe that the KRA could focus on a few other areas. For starters, it ought to device ways of increasing the percentage of taxable people within its net. According to the taxman, only 20 per cent of adults in Kenya are currently registered on iTax.
We can reasonably assume that a certain percentage of Kenyans are generating income that escapes the tax net. Currently, individuals have numerous identification numbers issued by various public institutions, including KRA.
This has made it difficult for the authority to track economic activities of many individuals.
Edna Gitachu is a Tax Senior Manager at PwC Kenya while Nelson Musau is a Tax Manager.