The government has laid out plans to plug loopholes that allow individuals and firms to evade paying taxes.
The elaborate plan was revealed by Treasury in its recent budget document for the 2023-24 financial year that starts in July.
The cash-strapped William Ruto administration reckons that plugging old loopholes for tax evasion will broaden the tax base at a time efforts to widen the tax base by introducing new taxes have hit a snag.
Prioritising sealing loopholes instead of purely focusing on introducing additional taxes is seen as an easier route to broaden the tax base by the Treasury.
This comes at a time Kenyans are hard-pressed by the cost of living.
But the new plan is aimed at broadening the country’s tax base by catching tax evaders and raising revenue to enable the Ruto government to deliver on its raft of rosy pledges over the next financial year.
The plan will enable the new administration to wean itself off reliance on public debt and implement its campaign manifesto.
The Kenya Revenue Authority (KRA), which is undergoing reorganisation including searching for a substantive commissioner general, has previously confronted tax evasion, tax fraud and tax compliance which has contributed to its missed targets.
As part of the planned far-reaching revenue-raising measures, the Ruto administration will help KRA use third-party data such as the wealth status of an individual or all commercial transactions conducted via mobile money services to help the country close its tax gap.
The third-party information tools such as tracking of all purchases made by an individual of new luxury cars and homes will act as backup for the KRA to ensure that people pay their due taxes.
“Through leveraging on automation of systems for all key government entities integration of KRA tax systems with critical Government systems to allow seamless of information for a 360-degree of the taxpayers’ economic transactions and the enhancement of KRA capacity on big data analytics to drive compliance interventions,” says the National Treasury.
This KRA system of tracking tax evasion through third-party information will be an alternative plan of the tax administration, should the taxpayer choose not to disclose relevant information to the revenue authorities.
KRA will therefore track individuals’ and companies’ commercial activities with the help of Government departments like land registration, licensing authorities, National Transport and Safety Authority (NTSA), insurance agencies, commercial banks and forex bureaus to verify the “correctness” of income tax returns filed by payers.
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Here is a simple example to demonstrate how third-party data will help KRA improve tax compliance.
Assume that Person X whom we shall call Mr Kamau has filed an income tax return that is currently being audited by KRA.
KRA will have no means to verify the return in the absence of third-party data such as bank statements, real-estate ownership, and car registration. In this case, if Mr Kamau under-declares their income, the KRA won’t be able to challenge it.
Let’s now consider an alternative scenario, where the KRA has access to asset ownership data and has found out that Kamau bought expensive real estate worth Sh200 million in the upmarket Runda Estate in Nairobi.
Yet, they have declared annual earnings of only Sh10 million, didn’t sell any assets, or take any loans that year.
With access to third-party data - in this case, asset ownership - KRA will challenge Kamau’s self-declaration.
Assume that the land agency in the country has real-estate data and NTSA has access to car ownership/registration data. This data will be accessed by KRA, but only if it is made available to them by the land agency and NTSA in an accurate and timely manner.
The Ruto government also plans to revive a controversial Uhuru-era outfit used to contain runaway smuggling in the country during the previous regime.
The outfit comprised a multi-agency team formed by former President Uhuru Kenyatta and conducted infamous sting operations against illicit trade.
It helped recover billions in tax receipts but rubbed many businessmen, especially in the informal sector such as Nairobi’s Nyamakima trade hub the wrong way.
The outfit, led by the former deputy head of Public Service Wanyama Musiambo, conducted operations for many months, seizing counterfeit, sub-standard and smuggled goods.
Estimates have pointed to a loss of Sh200 billion every year in potential government revenue as a result of dealing in illicit goods.
The multi-agency team comprised the Anti-Counterfeit Agency (ACA), the Kenya Bureau of Standards (Kebs), KRA, the Immigration Department, the Office of the Attorney-General, the Office of the Director of Public Prosecutions, the Inspector-General of Police, Financial Reporting Centre (FRC), National Intelligence Service, among others.
“KRA will enhance compliance through the formation of a multiagency team to investigate the source of counterfeits and take necessary action,” says the Treasury.
The Treasury says the team will deploy data and intelligence-driven field operations to take down counterfeiters.
A State survey conducted between October 2019 and February 2020 showed that the 16 sectors of the economy that the study concentrated on – building, mining, and construction – were heavily affected with a share of 23.37 per cent in value of total illicit trade.
In 2019, some 12 top-of-the-range vehicles, which Kenya and UK border patrol teams said were stolen from the UK, were seized at the Port of Mombasa following an intelligence report as part of the operations.
Treasury also says KRA will be required to raise value-added tax (VAT) collections by fully rolling out a new electronic Tax Invoice Management System (eTIMS).
The new system collates data from all traders, individuals and companies in the country in near real-time, tightening the noose on tax cheats.
Armed with new electronic invoicing and reporting tools from the new eTIMS, KRA will be able to collect information without waiting for taxpayers to file, even at the point of a commercial transaction to make its own assessment of the tax due.
Treasury reckons this will address, the “missing trader phenomenon as well as non or under declaration of sales and fictitious input claims.” The KRA will also target to ensure all persons doing business with the government pay their tax obligations.
“There will be close monitoring of payments from government to ensure correct taxes are declared and paid,” says Treasury.
Treasury also wants to place resident officers in factories to monitor production and end tax evasion.
Calls for meaningful tax reforms have mounted weeks after data showed that the taxman could miss the annual target of collections. The current team of bosses and staff at KRA has been under pressure from the Kenya Kwanza administration to seal revenue leaks through corruption and boost State coffers to enable Treasury to wean itself off reliance on public debt.