Kenya Revenue Authority’s (KRA) projection in its strategic plan for the next three years to collect Sh6 trillion in domestic revenue by 2021 sounds too ambitious by all standards.
According to the taxman, the revenue targets will be met by increasing the number of taxpayers in the country from the current 3.9 million to seven million by 2021. This will be supplemented by boosting compliance among existing ones.
“This will be achieved through investments in technology and reforming business processes that we believe have provided the foundation for us to do much better,” said KRA Commissioner-General John Njiraini during the launch of the firm’s seventh corporate strategy.
Mr Njiraini said KRA’s investment in technology has seen the taxman improve the regulator’s database on corporate and individual taxpayers, closing avenues often exploited for tax evasion. “We are seeing incredible results from the intelligence we are collecting and we believe the seventh corporate plan will be a different ball game,” he said.
Last year, Treasury introduced the presumptive tax through the Finance Bill 2018 that will see Small and Medium Enterprises (SMEs) earning less than Sh5 million each year pay 15 per cent of the amount payable for their business permits.
The tax, which came into force this month, was meant to enforce compliance in the informal sector, where the State has for years tried unsuccessfully to widen the tax bracket. “Presumptive tax was specifically introduced for the sector that has not been enabled to comply with taxes and it targets SMEs,” said Maurice Oray, deputy commissioner of corporate policy.
Mr Oray said the presumptive tax is meant to help the Government raise revenues for funding the ambitious Big Four agenda.
Analysts want KRA to train its guns on large taxpayers dodging taxes running into billions of shillings through fraudulent schemes, instead of burdening individuals and small businesses that form a small percentage of the revenue basket.
“While we understand the need to broaden the tax bracket and raise more revenue, charging SMEs 15 per cent presumptive tax is on the higher side and could dampen compliance,” explained Leonard Wanyama, coordinator of the East Africa tax and Governance Network (EATGN).
And in one of the largest tax evasion cases in recent history, KRA last year sued Chinese firm Housemart Company Ltd seeking to recover Sh2.2 billion in unremitted taxes.
The revenue collector cited the importer of building and construction materials and household goods, for evading Value Added Tax (VAT), through under-declaring more than Sh3.2 billion in sales, translating to Sh517 million in VAT arrears.
Housemart Managing Director Ye Wei was charged with four counts of tax evasion using proxy companies with offenses dating back to 2015.
“On diverse dates between January 1, 2016, and June 30, 2017… being the managing director of Housemart Company Ltd…willfully defaulted in paying Sh583.3 million being income tax payable to the commissioner of Domestic Taxes in contravention of the said act,” reads one of the charges in part.
According to court papers, KRA accused Housemart of registering several firms including; Colila Ltd, Akubi Ltd, Nkemm Ltd, Obest Ltd, Sunda Industrial Company and Wise Databank Ltd, where Sh2.2 billion was moved in dubious transactions.
This saw KRA freeze the company’s bank accounts and those of the alleged proxies. The taxman also accused Wei of dodging a total of Sh239 million in income tax payments between 2015 and 2017 as well as other levies.
“Between 20th January 2016 and 20th December 2017… being the managing director of Housemart Company Limited…deliberately defaulted an obligation to declare sales amounting to Sh3.2 billion to the commissioner of taxes as required by the Value Added Tax No 35 of 2013.”
Last December, the company was appointed to the board of the Kenya Chinese Economic and Trade Association - a lobby group bringing together firms with investments in Kenya such as Huawei and China Wu Yi.
Housemart is reportedly seeking to settle the matter out of court, with the case expected to head to KRA’s Tax Tribunal in coming weeks. Despite the ongoing legal dispute, however, the company still maintains operations to this date.
The case has cast the spotlight on foreign firms operating in the country under little regulatory oversight as well as the trading practices between subsidiaries that span several territories.
A report by international think tank Global Financial Integrity released in October last year said Kenya loses billions of shillings in foregone revenue from traders under-declaring or overestimating the value of import and export goods.
“We find that Kenyan imports of cereals from Pakistan, mineral fuels from India and, more generally, imports from China to be particularly prone to potential revenue loss to the Government of Kenya due to under-invoicing,” explained GFI in the report.
The report analysed trade figures between Kenya and her bilateral partners and estimated the country lost Sh90 billion in 2013 alone, with GFI saying the figure was conservative and the loss could be much higher if other trade data is factored.
“For 2013, we can reasonably identify potential revenue losses in excess of Sh90 billion or about eight per cent of total Kenyan government revenues,” said the report in part.
Mr Wanyama says KRA can bridge revenue shortfalls if it shifted focus to policing compliance on the part of large corporate taxpayers instead of slapping small businesses with punitive rates.
“In Uganda, the presumptive tax rate is 1.5 to three per cent and we have heard reports of Kenyan businesses along the border move to Uganda to avoid paying the new rates,’ he explained.
EATGN has submitted proposals to the Treasury seeking revision to the Income Tax Bill 2018.
“Regrettably, the Income Tax Bill 2018 does not reflect the principles of equity, social justice, inclusiveness, equality, human rights, non- discrimination and protection of the marginalised,” states the tax lobby group in part.
EAGTN says the tax introduced this month should be revised from the current 15 per cent to between one and three per cent to boost compliance. The lobby group also wants Treasury to widen the tax base of companies charged 35 per cent income tax.
“The provision for charging 35 per cent for companies with incomes exceeding Sh500 million is an ineffective provision as Kenya does not have a lot of companies that make it to this threshold,” explained Wanyama.
EAGTN recommends that the threshold of Sh500 million be lowered to Sh100 million to up the revenue haul and facilitate KRA to achieve its targets.
The proposals also touch on individual earners, saying the 35 per cent higher tax rate on those earning more than Sh750,000 per month constitutes a narrow tax base.
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