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Why taxman keeps falling short in tax targets

President William Ruto.

In more than a decade, the Kenya Revenue Authority (KRA) has met its revenue collection target only once.

This has been attributed to the National Treasury’s failure to put in the right mechanisms to grow the tax base.

The National Assembly’s Budget and Appropriations Committee (BAC) in a June 2023 report noted that the National Treasury has over the years had the tendency to set unrealistic revenue collection targets for the taxman.

This, the committee said, had often resulted in underperformance by KRA, resulting in the budget deficit growing and, in turn, the government borrowing more.

The underperformance over the 2022/23 financial year had the impact of pushing up the fiscal deficit to Sh840 billion from the earlier Sh824 billion. This was adjusted late into the financial year, in mid-June, through a second supplementary budget.

“The committee observed that due to the expected underperformance of revenue collection, the fiscal deficit, including grants has expanded by Sh16.9 billion from Sh824 billion (5.7 per cent of Gross Domestic Production) to Sh840.9 billion (5.8 per cent of GDP),” said the committee in a report to Parliament on the second supplementary budget for the 2022/23 financial year.

“This (shortfall in revenue collection) is an indication that the National Treasury continues to set over-ambitious revenue targets during the budget-making process, resulting in a larger than projected fiscal deficit towards the end of the financial year when the revenue targets are not met. As such, the deficit has always remained a moving target over the years.”

The government is expected to meet the expanded deficit through local borrowing, which the committee noted presented a risk in banks denying local businesses and households loans and instead offering the government through buying Treasury bills and bonds.

“The committee expressed concerns over the increased appetite for domestic borrowing especially given the non-responsiveness of the markets,” said the committee’s report.

“The committee further indicated that although over-reliance on domestic borrowing may ease exchange rate from external borrowing, it may have a bearing on credit to the private sector where commercial banks prefer to lend to the government at the expense of the private sector or lend at unfavourable interest rates thereby hampering the sought private sector-led economic growth.”

The taxman pulled a rare feat in the 2021/22 financial year when it collected Sh2.031 trillion, surpassing its target for the first time in fourteen years that the authority has exceeded its original target in revenue collection.