KRA needs wisdom and common sense more than laws on taxation

A section of newly recruited Kenya Revenue Authority revenue service assistants during their passout parade at the Kenya Defense Forces Recruits Training School in Eldoret on August 25, 2023. [Courtesy)

When President Ruto suggested a tax revenue target of at least Sh5 trillion for the Kenya Revenue Authority (KRA), this column shared her reservations as to how realistic these numbers were. One year later into Kenya Kwanza's administration, there is no evidence or indicators that the country will ever achieve such an ambitious revenue target any time soon.

I do not take this position out of pessimism. The view is inspired by the words of a famous New York Professor of Statistics E. Edwards Deming who lived through the second half of the 20th century. He said "In God we trust; all others must bring data".

While the numbers have not fully crystalised, there are indicators that the heavy taxes imposed by the KK administration are taking a toll on the taxpayers. Production and consumption are on the decline as predicted by the balanced economist in town. Besides, there have been growing disquiet on the aggressiveness with which the taxman has been going about his business. This seems to have reached its boiling point this week with the explosion on the nasty treatment that travelers have had to endure in the hands of customs officials at the Jomo Kenyatta International Airport and other ports of entry.

In response to the public outcry, the taxman issued a Memo on what they considered as import tax thresholds before retracting it. Unfortunately, the damage was already done and the memo trended across various platforms, including tourist ones.

This leads us to the fundamental question of this article today: Is taxation just about the laws?

In its very nature, citizens' payment of taxes to the state is the ultimate acknowledgement of the legitimacy of the government and a demonstration of one's loyalty to their civic obligations to the State. While in theory taxation is a mandatory diversion of private income to fund public goods and services, the tax laws in Kenya are premised on the principle of self-assessment.

This means that it is the tax payers who review their own incomes and determine the taxes they ought to pay to the State as set out in law. This is the logic behind the annual fillings of our taxes each year. The net effect is to lessen the obligatory burden that a tax payer may experience in remitting their dues to the state. What happens when this balance tilts against the tax payer?

Dairy cows

In October 2022, Deputy President Rigathi Gachagua suggested to the taxman that he should treat tax payers like dairy cows. Figuratively, that meant that the aggression of the taxman against taxpayers can significantly impair the government's ability to collect taxes from the citizens. The Courts seemed to share the same opinion in their ruling in one of the long protracted legal battles between KRA and Keroche Breweries.

The business community has consistently complained about the arbitrary compliance requirements and tax tracking devices they are required to install every other time. There would be many factors that policy makers in the KK administration would want to consider while they seek to maximise their tax collections.

One is the impact of their taxes and collection measures in production. The government in Kenya is not a big player in the productive side of the economy given ours is a market-based leaning economic system. That means that the government relies on businesses and individual citizens to produce before it takes part of their earnings in form of taxes. The law notwithstanding, the governments tax revenue can only depend on how much businesses and citizens produce. For as long as the imposed taxes and tax collection measures hurt production, the government revenue targets will remain a mirage.

Two, is the impact of the taxes on consumption decisions. No government under the sun can dictate what her citizens, natural persons or corporates, will do with the money they earn. This is the most basic unit in economics and what the branch of micro-economics is all about. However, there is a nexus between the microeconomic unit spending habits and key macroeconomic variables.

Take, for instance, the effects of VAT increase on petroleum products. This past week, data has started streaming in that target tax revenue from these products has been missed by an estimated Sh12.9 billion in the quarter. The regulatory tracking data released recently showed consumption dropped in all petroleum classes in the second half of the 2022/23 fiscal year. Any keen observer by now must have noticed the easing of traffic congestion in the main urban centres across the country. Tragically, the KK policy makers imagine these are transitory adjustments by the consumers as they keep on rallying more taxes and violating consumer privacy when collecting what they have already imposed.

Three, is the implication of the taxes on the country's competitiveness. The economic realities of today is that global capital flows have tightened in response to the recent economic and heath pandemic shocks. The competition to attract the little capital that is flowing around is also tightening by the day. Regional factors, economic trading blocs and bilateral relations among nations are weighing heavily on what are the destinations that foreign capital would flow to.

Take, for instance, an investor eying the East Africa Community region - do we imagine that the burden of the housing levy, the upcoming health insurance levy, the compliance burden imposed by the Finance Act 2023 and treatment of her travelers at the ports of entry by KRA officials are inconsequential on their decision? Based on the EAC trade protocol, an investor can easily access the entire market from the region. Thus, the final decision largely narrows down to which country their production costs will be lowest and taxation less invasive.

Foreign Direct Investments (FDI) capital flows data that I have shared in the past clearly indicates Kenya's flows are on the decline while Tanzania and Uganda flows are on an upward trend. In any case, we long lost our standing as the beacon of political stability in the region. Tanzania took up that spot and that is consequential to both foreign and domestic investors.

Finally, is the impact of our levies and taxes on the associated value chains. Perhaps the most difficult part of analysing the impact of taxes is tracking how they affect the associated industries and value chains. By all intents and purposes, taxes must seek to stimulate a contagious multiplier effect within and across value chains and sectors.

The integration of modern economic systems makes it impossible to limit the impacts of a tax to one sector only, whether positive or negative. For example, there have been news circulating on social media of a tripling of park entry fees in the Maasai Mara Game Reserve for both domestic and foreign tourists. This facility is shared by both Kenya and Tanzania and one can access all the flora and fauna within it from either country. So why would a tourist want to access it from the Kenyan side if the rates are much cheaper on the Tanzanian side? Beyond the park entry fees lost, how much more does the country lose in hospitality and branding revenue if enough tourists make the same decision?

The KK administration is well endowed with economists of no mean repute, but their policy choices seem uninspiring in terms of preservation of our long term competitiveness as a nation. But time will tell, for sure!