In the last three months, no government agency has been as busy as the Kenya Revenue Authority (KRA).
President Uhuru Kenyatta’s administration is fast running out of leg-room for borrowing, but with a sluggish economy it is also difficult to collect more taxes. As a result, KRA has been tasked to come up with a magical formula to keep the government machinery running.
However, it will not be easy for the taxman, which despite falling short on its tax collection target, saw its target for Financial Year 2019/20 pushed further up to Sh1.8 trillion.
Employees in the formal sector are being laid off, hampering collection of income taxes such as Pay-as-you earn (PAYE) and corporate taxes from salaries and profits respectively.
Cut spending
According to the latest Kenya Economic Update by the World Bank, collection of Income Tax has declined “significantly” compared to other tax-heads, in what the global lender has attributed to non-tax revenue rich sectors such as agriculture — which has expanded as a share of GDP from 27.5 per cent in 2014 to 34.2 per cent in 2018 — and public sector investments.
“For instance, while agriculture accounts for about 34.2 per cent of nominal GDP in 2018, its contribution to revenue is just about 2.6 per cent. This contrasts with manufacturing that accounted for 7.7 per cent of nominal GDP but about 18.2 per cent of tax revenue,” said the World Bank in the survey.
The Washington-based institution also noted that while Kenya had about 9,482 Kenyans among the world’s high net-worth individuals in 2018, that did not seem to help in personal income tax (PIT), known as PAYE.
Instead, revenue collection through PIT has declined from 4.9 per cent of GDP in FY2013/14 to 4.1 per cent in FY2018/19.
The alternative for the government would have been borrow more, but that too is not in the cards as any more debt baggage will put the country’s financial position in a dangerous position.
Left with no more places to increase taxes, the Exchequer has turned on its tax agent to help fund President Kenyatta’s Big Four Agenda. This is part of the Treasury’s fiscal consolidation in which it aims to reduce borrowing by coming up with policies that will help it collect more taxes even as it cuts on spending.
“The fiscal consolidation will benefit from the revenue mobilisation being undertaken by the KRA, the revenue policy measures in the budget and complemented by expenditure rationalisation to reduce non-core expenditure items from the budget,” said National Treasury Principal Secretary Julius Muia during the launch of the World Bank’s latest Kenya Economic Update.
With a sluggish economy, KRA has gone hard to tax evaders, a situation that has some companies close shop after the taxman slapped it with what they thought were “abnormal” tax bill.
KRA hopes to recover Sh15 billion, mostly through plea bargaining, where the suspects agree to pay the money in exchange for amnesty.
In the last three months alone, the taxman has brought charges against a number of individuals, including some of its employees as the fight against tax cheats intensifies.
The agent won a Sh2.3 billion case against a Dubai-based company which had moved to court to prevent KRA from collecting the tax debts.
On September 26, the taxman dragged three tax agents to court for fraudulently aiding two companies to reduce their tax liability, a crime that the Treasury has for long suspected has denied it revenues.
And on October 16, directors of Microbit System were charged in a Magistrate Court for tax evasion amounting to Sh273 million.
Evading payment
Some of the prominent individuals that have been on KRA’s radar include billionaire businessman Humphrey Kariuki.
The founder of Africa Spirits, the alcoholic beverage maker at the centre of suspected Sh41 billion tax fraud, has since distanced himself from the management of the firm.
“We have a 94 per cent success rate on these cases, and we want all our cases publicised,” said Dr Edward Karanja, KRA’s head of tax investigations at a briefing on the authority’s annual revenue performance in Nairobi last month.
With the private sector struggling amid a tough operating environment, the taxman has found it even harder to meet its targets.
KRA has, in turn, had to rely on tax compliance, which is the degree to which a taxpayer complies by declaring their income, filing a return and paying the tax due in a timely manner.
Of the eight million registered taxpayers - from 20 million adults - KRA believes there are still many Kenyans in the tax bracket not paying their fair share of taxes.
Deputy Commissioner Strategy, Innovation and Risk Management at KRA Joseline Ogayi said the recent campaign against tax evasion should not be construed to mean the tax agency is targeting individuals but it is only trying to ensure tax compliance.
Ogayi noted that with growth in most tax heads, including value-added tax (VAT) and employees’ PAYE underperforming, the taxman is going to ensure that every eligible individual is roped into the tax net.
In the financial year 2018/19, KRA was able to recover Sh8.3 billion from a target of Sh10 billion.
“The case that was successfully investigated involved suspects who were charged in court for evading payment of Sh7 billion in value-added tax (VAT) and income taxes,” said the head of tax investigations Karanja.
According to KRA, the suspects had registered more than nine business names and used them to make fictitious invoicing in excess of Sh15.3 billion.
There was also a case of misdeclaration of a shipment of high-Value tobacco originating from Mumbai, India which was booked as cereals.
It seems like the efforts have so far paid off with the Treasury official Geoffrey Mwau noting that tax revenues in the first quarter grew by 16 per cent, the highest in recent times.
With preliminary returns for the first quarter showing that the revenue mobilisation efforts were paying off, Muia projected a return to the fiscal consolidation path with the fiscal deficit (Percent of GDP) projected at 6.2 percent in FY 2019/20 and 3.4 percent over the medium term.
Besides shoring up revenues as part of fiscal consolidation efforts, the Treasury has also decided to institute austerity measure that will non-essential expenditures such as foreign travel and training slashed by more than 50 per cent.
But KRA has also got a boost after the National Treasury admitted that it has been pushing the revenue collection target to unrealistic levels, a feat that has seen the taxman miss it target year-upon-year.
Acting National Treasury Cabinet Secretary Ukur Yattani said they had since learnt from the years of revenue shortfalls that they have been setting targets too high.
As a result, he told National Assembly’s Budget and Appropriations Committee, Treasury had decided to cut the target for the current financial year.
The Treasury had set a tax collection target of Sh1.8 trillion in the current financial year, despite KRA missing last year’s revised target by about Sh100 billion.
The KRA expects to charge 600 suspected tax cheats in the next 12 months as it moves to recover lost revenue.
