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Tax burden needs to be shared equitably
By Ibrahim Khalif | November 22nd 2018
The issue of tax evasion has been a subject of public discourse in the recent past with the president pronouncing himself on it during KRA’ s distinguished taxpayers awards ceremony held at the end of last month.
As Frederick, the great, said, ‘’no government can exist without taxation; the money must necessarily be levied on people’’. But he hastened to add ‘’the grand art consists of levying so as not to oppress’’.
The feeling among the compliant taxpayers is that there are persons who are eligible to contribute to the tax revenue but have chosen to stay under the radar of the taxman.
One of the canons of taxation as theorized by Adam Smith is equity. Under this canon, he stated that the subject of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities.
Multinational corporations have been the punching bag for civil societies and taxman when it comes to tax avoidance. Some reports put figures upwards of Sh600 billion annually as revenue ‘’losses’’ as a result of transfer pricing by such entities.
While base erosion and profit shifting is global issue which countries including Kenya are grappling with, I have reservations on the numbers bandied around with regard to what we are losing.
The notion that we are losing a lot of tax through transfer pricing might have informed the decision to make tax evasion a lesser evil than tax avoidance by making the penalties and interest for the latter not remittable.
This means that a criminal act (tax evasion/fraud) is ‘’favoured’’ over a moral act (tax avoidance), which I find illogical.
Based on my experience advising multinational corporations on tax, none worth its salt would try ‘‘monkey business’’ due to the risks and reputational damage such an action would visit on their brand.
What some do, which is legal is that they try to ‘’manage’’ their effective tax rate through tax planning by using the loopholes in the tax legislations.
In the spirit of the proverb, ‘’charity begins at home’’, as locals, we need to ask ourselves how compliant we as individuals and businesses we own/manage, are, before vilifying multinational corporations.
A seemingly ‘’innocuous’’ public notice issued by KRA in February last year to VAT registered taxpayers could be a pointer to the level of tax non-compliance by local businesses.
The notice touched on the need for taxpayers to make full and proper disclosure of both input VAT and output VAT for purpose of matching of data.
The public notice was followed by a long list of taxpayers who were flagged for inconsistencies in their VAT returns.
While some of the anomalies may be as a result of disclosure and system challenges, a significant component could be as a result of deliberate omissions to evade tax payment.
My latter assertion is supported by the arraignment in court in April this year of individuals suspected to have been masterminds of tax evasion racket involving VAT input claim estimated at KES 7 billion.
In same vein as the crackdown on illicit trade, VAT evasion crackdown is a noble one even though having let such schemes to go on for such a long time it is an indictment of the government agencies mandated to fight both.
That said, it is better late than never.
The crackdowns could turn out to be the answer to the long underperformance of VAT revenue and enhancement of revenues of other tax obligations such as Customs Duty, Excise Duty and even Income Tax, if sustained and carried out objectively without stereotype, bias and with proper checks and balances.
In addition to the above group, KRA needs to focus on those who have PINs but are inactive as well as those eligible to have PINs but fail to register.
Tax is a major cost component of doing business and KRA, as the body mandated to collect it has a pivotal role to play in ensuring level playing field for businesses and individuals. It needs to ensure that no section of the society enjoys an unfair advantage over others due to non-payment of tax.
The taxman has been talking of installation of data warehouse and business intelligence solution that will enable linkage to mobile money transfer and bank records for the last 3 years.
The process might still be underway but in the meantime, he needs to go after tax evaders using whatever resources and data currently at its disposal.
County government records, NTSA, Lands records and Customs Department are rich data sources. Others are Company registry, NSSF, NHIF as well as government agencies for supplies and services provided to them.
It is only recently that we have seen efforts made to use import and export information to flag non-compliant taxpayers, which efforts need to be expanded and sustained so that tax burden can be shared equitably.
Mr Khalif is a Finance and Tax Expert
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