Reports wrong on KRA performance

Recent commentaries in the public domain have made inaccurate allegations touching on the performance of Kenya Revenue Authority (KRA) and on the Office of the Commissioner General. From the nature of the observations, it is evident that the public deserves an objective brief that provides an accurate perspective in respect of revenue performance and KRA governance generally.

An allegation has been made that commissioners lack the authority to execute their mandates, which by implication curtails their ability to perform and effectively collect revenue. Commissioners, being senior executives, play largely leadership roles of managing, motivating and monitoring staff performance. Key among the roles that commissioners play, are those of staff recruitment and deployment, processes undertaken jointly by them and the Human Resources department, in line with approved policy.

Commissioners are also primarily responsible for discipline enforcement, including recommending action against non-performing staff, a role they play without hindrance from any quarters. For the record, it should be noted that core revenue collection operations are not undertaken by commissioners, but by line staff in various units and regions across the country. It is the commitment and diligence of staff engaged in varied roles, including audit and compliance operations, that facilitates revenue collection. KRA’s success is therefore not predicated on the achievements of individual offices but rather on collective team effort that has helped place revenue collection on an upward trajectory for the last 13 years.

Regarding revenue performance, factual evidence paints a markedly different picture from that propagated by detractors. During the present fiscal year, cumulative revenue growth to 31st December 2015, stood at 9.8 per cent in comparison with the same period in the previous year.

Notably, several taxheads performed above target or recorded growths exceeding 16 per cent. These include Import Duty, Excise Duty on Imports, Domestic VAT and Domestic Excise Duty.

The latter two taxheads for example, performed at 105 per cent and 103 per cent respectively, with both growing at rates in excess of 20 per cent. Excise Duty performed strongly and above target despite Parliament’s five-month delay in passing the Excise Act, which was finally enacted into law in December 2015. The impact of the delayed passage cost the Exchequer at least Sh8 billion.

The main shortfalls in the present fiscal year arise from Income Taxes (PAYE and Corporation Tax), while for Customs, the main problem area is Import VAT. PAYE achieved growth of 8.2 per cent for the six months to December 2015, while Corporation Tax growth was flat (though growths for January and February 2016 have improved, building optimism for the second half).

In comparison, projected annual growth rates for the two taxheads stood at 19 per cent and 15.5 per cent respectively. Import VAT on the other hand grew at 3.5 per cent in comparison with projected growth of 23 per cent.

PAYE’s low growth is largely attributable to freeze in both Government recruitment and wage increases. According to the 2015/16 Budget Policy Statement, public sector wage bill growth was projected at 7.6 per cent, well below the projected PAYE growth of 19 per cent, but pretty close to achieved PAYE growth of 8.2 per cent for the six months to December 2015.

For the private sector, all indications point to payroll stagnation caused by retrenchments or freeze in staff recruitment. It is therefore not realistic to expect strong growth in PAYE in the absence of robust payroll performance in both the public and private sectors. Despite this scenario, ongoing work at KRA, coupled with improved National Budget disbursement, have improved PAYE growth over the last three months to an average monthly growth of around 10 per cent. Corporation Taxes have performed poorly primarily due to dismal corporate profitability attributed to, among others, poor business environment, high financing costs and exchange losses resulting from currency volatility in the first half of the year. It is in the public domain that at least one-third of NSE-listed companies have issued profit alerts, denoting depressed profit prospects in 2015/16.

In engagements with private sector players, including the Kenya Association of Manufacturers, the point has emerged that many businesses are experiencing depressed profit prospects, a matter likely to continue negatively impacting Corporate Tax collections.

To underline the point, the Central Bank’s report issued in December 2015, reports an increase of only 5.3 per cent in pre-tax profit for the banking sector for Quarter 1 of FY 2015/16, attributing this low profitability largely to increased bad debt provisioning. The results of this depressed performance are already being felt through reduced tax remittances from the banking sector, which grew by only 3.6 per cent for the six months to December 2015.

In respect of Customs, Import VAT performance is adversely impacted by policy decisions that exempted donor funded projects from VAT payment in the June 2015/16 Budget amendments.

In essence, this decision meant that key public projects including the Standard Gauge Railway, JKIA expansion and major infrastructure projects including port and road construction do not contribute towards VAT collection. The estimated VAT revenue impact of donor project exemption for the half year to December 2015 is Sh6 billion. When adjusted for the various negative impacts caused by policy changes, overall revenue growth to December 2015 rises to over 12 per cent, a realistic achievement given the GDP growth achieved of around 5 per cent.

In conclusion, revenue performance in FY 2015/16, is within reasonable limits given environmental factors outside KRA’s control. The very strong performance for consumption-based taxes (Domestic VAT & Excise Tax) is attributable to key reform programmes including implementation of the iTax platform that is facilitating better data and intelligence collection.

Ongoing initiatives to address customs malpractices are expected to provide a strong boost to revenues in the fourth quarter of fiscal year 2015/16. These crucial initiatives will be sustained despite their likely short-term inconvenience to business through bottlenecks presently being encountered in the import supply chain.

Going forward, it is crucial that appropriate flexibility is built into tax revenue forecasting so as to achieve proper balance between projected revenues and actual collections, based on empirical data and taking into account changes in macro-economic indicators. How many Kenyans for instance know that import cargo volumes have been on the decline in the first half of the year, contrary to misleading claims made recently in the media of “huge growth in imports”.

This crucial aspect of aligning revenue projections to more objective criteria, is on the agenda for discussion between the National Treasury, KRA and relevant parliamentary committees in respect of budget projections for future years.

KRA will in the meantime continue implementing varied reforms targeting governance, processes and technology as part of its strategy to deliver for Kenyans, sustainable long-term revenue collection and service delivery solutions.