Rotich caught between a rock and hard place on taxes

Taxpayers should brace for tough times ahead as the National Treasury seeks to fund a Sh3 trillion 2019/2020 budget. Still, a massive Sh630 billion hole would have to be filled through borrowing or grants, a move likely to worsen the country’s debt situation.

Currently, Kenya is spending more than half of tax revenues on its debt.

Kenyans are yet to recover from the new taxes loaded on to them last year, as Treasury sought to grow its revenues. However, this is yet to reflect on collections by the Kenya Revenue Authority that is again expected to miss its target of Sh1.6 trillion by end of June this year.

This comes as Cabinet Secretary Henry Rotich is set to present Kenya’s Sh3 trillion spending plan and revenue raising mechanisms later this week on the backdrop of unprecedented public debt and falling tax revenues.

With tax collections falling behind target despite new measures introduced in the 2018/2019 financial year, the government will most likely resort to introducing even more levies to bridge the deficit.

Treasury has already crossed key fiscal policy red lines, leaving little room to navigate. At Sh630 billion, the budget deficit is currently nine per cent higher than the Sh578 billion Treasury target while public debt as a share of GDP has crossed the 50 per cent mark and is steadily rising.

At the same time, new allocations proposed by Parliament totalling Sh23 billion will most likely increase the financial burden on taxpayers as the Government abandons all pretext of fiscal consolidation.

This has thrown a spanner in the works of President Uhuru Kenyatta’s Big Four Agenda with Treasury and Members of Parliament last week engaged in an hours-long session to find common ground.

“The 2019/2020 budget is higher than the Budget Policy Statement approved ceiling by Sh78 billion, indicating the government’s propensity to spend despite the need for austerity,” said the National Assembly’s Budget and Appropriations Committee in its report last week.

In the session that ran past 7pm, MPs raised issue with Treasury’s borrowing spree as well as the taxman’s inability to grow the tax bracket.

“The actual budget implementation may adjust expenditure upwards,” said the committee.

“History has shown a tendency for the Government to fail to adhere to its expenditure plans in the course of the year with upward adjustments during the supplementary budget particularly for the recurrent estimates.” 

Treasury responded by raising KRA’s revenue collection targets upwards by Sh35 billion to Sh2.1 trillion, citing improved tax administration practices and sealing of revenue leakages.

According to Parliament, the perennial failure of KRA to meet revenue targets is to blame for the creation of supplementary budgets to accommodate additional expenditures and meet public obligations.

KRA had raised Sh1.1 trillion as of April 30 this year, which was about Sh500 billion shy of the tax collection target for the financial year to June 2019 where the taxman is expected to collect Sh1.6 trillion.

It is unlikely to hit the target by end of this month, according to tax experts.

“KRA will not meet the targets. In the coming year, the difference between tax collection and revenue targets is likely to widen because businesses are not performing,” Michael Mburugu, partner at consultancy firm PKF, told Weekend Business.

“And that should inform them that the policies they have implemented over time are not working. Last year, there were many new taxes but there is an extent to which you can milk the cow without feeding it... the case for the Kenyan who is overtaxed but lacks enough opportunities to grow revenues and does not get quality government services. There are missed opportunities that will keep expanding.”

Audit and consultancy firm EY says the National Treasury has been banking on tax projections based on the number of Kenyans with Personal Identification Numbers to increase revenue collections.

However, many of these new taxpayers are yet to hold on to solid jobs, with some still in school, and cannot make contributions.

“Basing collections on the number of taxpayers more than growth is a bad thing because even students require a PIN to access loans. If you use this to assess revenues, then projections will be fundamentally flawed,” said EY tax partner Christopher Kirathe.

According to Treasury’s latest Medium Term Debt Strategy paper, Sh2.4 trillion of the country’s overall public debt stock is maturing in the next three years; the same period during which the Government hopes to execute the Big Four agenda.

This greatly constraints Treasury’s ability to marshal funds for both debt repayment and development projects.

Treasury has proposed additional revenues be raised from sealing revenue leakages, and growing the tax base but has remained vague on exactly how these reforms will be undertaken and how much additional revenue will be generated.

Last week, President Kenyatta replaced John Njiraini with KRA’s chief intelligence officer James Githii to lead the tax collection agency in what analysts believe is a show of commitment by the executive to seal revenue loopholes.

This is particularly crucial for the incoming KRA commissioner general as the government seeks more funding for the Big Four agenda.

At the same time, KRA is currently undergoing its greatest challenge yet in recent years in terms of mobilising revenue.

Tax revenue as a share of gross domestic product has fallen to its lowest in 10 years, standing at 15.4 per cent of GDP last financial year, down from 17.1 per cent in 2016.

Several MPs that Weekend Business spoke to yesterday expect a Budget Statement that factors in the high cost of living, Big Four Agenda and improved services to Kenyans.

Majority Leader Adan Duale said he hopes Rotich will put emphasis on the drought situation, the President’s agenda and reduced borrowing levels to cushion Kenyans from high costs of living as the country has hit the borrowing ceiling.

“The CS should come up with diverse ways to raise funds, including public-private partnerships (PPP) mostly in the energy and infrastructure sectors,” he said.

“He should juggle between big long term and low-hanging development which will be fruitful and result in a win-win situation.”

He noted that for the last two years, KRA has not been achieving its projections and therefore hopes the CS will stick to the estimates captured in the committee’s report.

National Security and Administration committee chairman Paul Koinange (Kiambaa) said though there are budget cuts to implementation of the Big Four Agenda by the Jubilee government, other areas like transition in the public service should be factored.

He said the budget estimates included Sh1 billion for recruitment of interns across the government departments.

“We hope the CS will include the Sh1 billion that will see between 10,000 and 20,000 interns hired every year to nurture the new civil service. The interns will be prepared to take over from those retiring from the public service,” Koinange said.

According to the Public Service Commission over 10,000 employees are will retire within five years.

Makueni Senator Mutula Kilonzo Jr, a member of the Senate Finance Committee, said financing is key to the budget.

"We have over-projected our revenues in the past, leading to supplementary budgets and excess borrowing. Our management of debt of Sh675 billion is something to worry about," he said.

Nominated MP Gideon Keter wants more funds for youth empowerment, saying the Sh18.23 billion set aside is not enough, especially if Sh10.38 billion is capped on recurrent and Sh 7.85 billion on development expenditure.

“We should have more funds for development. When you recruit 30,000 for paramilitary, 418 for textile, 9,000 in housing construction, 10,000 on light duties and 60,000 on entrepreneurship, it’s not even a quarter of the unemployed youth,” he said.

Kipkeklion West MP Hillary Kosgei said Uhuru should re-direct more cash to water, which is a key enabler of his legacy project.