According an article published in the September 11, 2018 edition of the Business Daily, the Kenya Revenue Authority(KRA) missed its fiscal year target of Sh1.65 trillion by 11 per cent, collecting approximately Sh1.48 trillion to make it the sixth straight year that the authority has continuously missed its collection target.
The last time KRA surpassed its revenue collection target was in 2011 when the Authority announced revenue collection of Sh4.1 billion above the target falsely convincing the Treasury that it was on top of its game. The persistent failure to meet revenue targets has come with far-reaching implications for the economy.
The country has been compelled to borrow heavily from the local and international markets, a scenario that has partly sparked the current row over controlling lending rates. Banks, struggling to obtain deposits, have been barely staying afloat. Because of the huge budget deficits, the Treasury has been disconcertingly piling debts.
Currently, the Kenya’s current public debt stands at approximately Sh4.884 trillion ($49 billion) or 56.4 per cent of the country’s gross domestic product. This is up from 42.8 per cent in 2008. This simply means that the country owes more than half the value of its economic output (GDP).
This is despite the recommendations by the International Monetary Fund that ratios of public debt to GDP should not be higher than 40 per cent for developing countries. Although the taxman blames the shrinking company profits and the massive employees layoffs as the main contributor to the missed targets, tax policy experts opine that the fewer taxpayers, less economic activities, and fewer income sources is the cause of the shortfalls.
KRA has left crucial economic segments outside the tax bracket and stuck to a few overburdened traditional payers in the formal sector. KRA has been focusing on the formal sector, which is easier to tax, encouraging taxpayers to shift to the informal sector to avoid the taxman.
As more taxpayers escape the tax net, they leave the burden of financing the national budget to the few workers in formal employment. The informal sector has been growing exponentially over the years as more and more people venture in to the sector. More interestingly, even most people in the formal sector have been investing in the informal sector as a means of getting an additional source of livelihood. Despite the enormous growth, the informal sector has been a hard nut to crack for many tax administrations owing largely to lack of defined structures.
While acknowledging that the sector is a high revenue generator, KRA has been unsuccessful in putting informal sector players within the tax bracket. KRA has commissioned several initiatives to increase its taxpayer’s base. 3.2 million Kenyans filed their 2017 income tax returns as at June 30, 2018 against the more than eight million active Personal Identification Numbers (PIN).
Despite the small percentage of the filed returns, this represents a 60 per cent growth compared to the previous financial year, which saw two million Kenyans file their returns in as at June 30, 2017.
The growth is attributable to the iTax system but KRA has a long way to go. For instance, due to our ineffective tax code there are individual property owners who are currently not filing tax returns despite earning rental income that is within the tax bracket.
Currently, only 15,000 individual property owners file tax returns annually against the estimated 100,000 who are eligible. The informal sector including property owners in various estates in Nairobi raking in millions without paying tax remains at large.
The large cash bases public transport in Kenya also deny the tax man revenues while the lowest paid employee have their dues chopped at the source to support the skewed revenue collection whose use in many cases is questionable. Our Income Tax Act has many loopholes, which make it difficult to draw a line between tax avoidance and tax evasion.
However, KRA should not tell people to appeal to their conscience to pay taxes. As long as the government cannot account for all the revenue it collects, then taxpayers cannot feel guilty for not paying taxes.
KRA needs to transform from an enforcement body to a service one and create a staff establishment that is professional, courteous, accessible and proactive in solving customer problems. In addition, the Authority needs to educate SMEs, business owners and corporates on the importance of paying taxes.
Dominic Nzuki, strategy consultant, Altima Africa Limited.