Treasury ruffled by KRA's bid to retain 2pc of total tax revenue

The Kenya Revenue Authority (KRA) has introduced a contentious proposal to retain two per cent of total tax revenue collected for its operations. 

The move has escalated tensions with the National Treasury, which has been pressing the agency to improve its revenue collection efforts.  

Despite consistently missing its targets, the taxman believes this proposal could provide a crucial lifeline for enhancing operational efficiency and meeting the ambitious goals set by the Kenya Kwanza administration. 

KRA argues that securing two per cent of the previous year’s total revenue is vital for funding initiatives aimed at advancing technology and capacity building.

Based on past collections, this proposal would see the National Treasury allocate approximately Sh48 billion to the tax authority. 

“To ensure the successful implementation of planned activities, we will negotiate with the National Treasury for the allocation of at least 2 per cent of the previous year’s revenue,” says KRA in its strategic document. 

In addition to this, KRA aims to increase its engagement with commercial entities for loans to cover budget shortfalls and seek support from development partners. 

“(KRA will) collaborate with development partners to finance selected projects and pursue loans for capital initiatives as outlined in section 16 (1)(c) of the Kenya Revenue Authority Act,” discloses KRA. 

Critics within Treasury have voiced concerns, arguing that diverting a portion of tax revenue for KRA’s operational costs could jeopardise the government’s broader fiscal strategy, especially amidst rising budget deficits and economic challenges. 

This proposal emerges at a time when KRA has frequently fallen short of its revenue targets, drawing heightened scrutiny from Treasury. Officials have underscored the need for KRA to optimise its collection processes rather than seek additional funding. 

Under pressure to plug revenue leaks, KRA faces heightened expectations from the William Ruto administration, which has set higher collection targets. 

In its latest strategic documents, KRA estimates it requires a total of Sh283.5 billion to attain operational efficiency over the next five years. 

President Ruto has publicly expressed frustration over KRA’s failure to meet these targets, urging the agency to eradicate corruption and leverage technology to enhance collections. 

His administration has prioritised broadening the tax base and increasing revenue to fulfill commitments made for the upcoming financial year.

The new Treasury Cabinet Secretary, John Mbadi, has also recently admonished KRA to improve its operations. 

Mr Mbadi has urged the agency to adopt innovative and technologically advanced strategies to bolster revenue collection. 

KRA’s shortcomings in meeting tax collection targets for the 2023-2024 fiscal year have dealt a blow to the government’s revenue and development ambitions.

Despite an 11.1 per cent rise in overall revenue to Sh2.407 trillion, KRA failed to meet its target, raising concerns among policymakers and industry stakeholders about the factors contributing to this underperformance. 

Originally, KRA aimed to collect Sh2.768 trillion by the end of the 2023-2024 fiscal year, but this was revised downward to Sh2.5 trillion, resulting in missed targets on both fronts. 

The struggle to achieve revenue goals comes at a critical time as Kenya faces economic uncertainty characterised by declining consumer demand. 

KRA has recently faced renewed scrutiny after Auditor General Nancy Gathungu disclosed significant discrepancies in tax revenue collection, with outstanding refund claims amounting to hundreds of billions, exposing potential losses for the government. 

In her critical audit report, the Auditor General accused KRA of failing to collect hundreds of billions in tax revenue, depriving the government of essential funds. The report indicated that KRA under-collected income tax revenue by Sh147 billion in the 2022-2023 fiscal year. 

The Auditor General’s findings revealed that 1,486 taxpayers reported a gross turnover of Sh2.54 trillion under their VAT obligations but only Sh2.05 trillion under income tax, resulting in an under-declaration of Sh490 billion. 

“The under-declared turnover of Sh490 billion under the income tax obligation would have generated a corporation tax of Sh147 billion, which the Authority failed to collect,” the report stated. 

In response, CS Mbadi urged KRA to embrace more innovative and technologically advanced revenue collection strategies. 

A press release from KRA following the CS’s meeting with its leadership emphasised the need for “continuous modernisation” in tax administration to streamline business processes, leverage advanced systems, and simplify tax transactions. 

“Our modernisation journey must align with our objectives and those of taxpayers. This approach will not only benefit taxpayers but will also significantly enhance our revenue mobilisation efforts,” Mr Mbadi stated. 

He highlighted that the National Tax Policy, which outlines the government’s tax expansion strategy, will support the enhancement of the tax base, promote fairness and equity in the tax system, and ensure predictability in tax rates and bases. 

“Through this policy, KRA must ensure higher tax compliance, improve taxpayer experiences, and reduce tax expenditures to minimise market distortions and tax refund pressures. As outlined in the policy, we will develop a framework for granting time-bound and growth-oriented tax incentives,” the CS concluded.

KRA earlier said it is planning to leverage Artificial Intelligence (AI) technology to bolster its efforts in catching tax evaders. 

The agency reckons the implementation of AI technology is expected to significantly improve its detection capabilities and end tax evasion. 

This is because AI can analyse millions of data points and identify complex patterns that would be challenging for human auditors to uncover. 

KRA Commissioner General Humphrey Wattanga reckons the implementation of AI technology is expected to significantly improve KRA’s detection capabilities, as the system can analyse millions of data points and identify complex patterns that would be challenging for human auditors to uncover.  

This will enable KRA to flag suspicious activities and potential red flags in real-time, allowing the agency to nab tax cheats more effectively. 

According to the Commissioner General, the new AI-powered system will be capable of mining vast troves of data to detect patterns and anomalies that could indicate fraudulent tax practices. 

“The adoption of data science, machine learning, and Artificial Intelligence (AI) will strengthen our ability to identify and address potential tax evasion through data-driven decision-making,” said Mr Wattanga. 

Artificial intelligence can automate laborious tasks and analyse huge sets of data and KRA reckons relying on AI systems would enable it to analyse transaction records such as bank statements and other financial data to uncover instances of underreporting, false deductions, and other forms of tax evasion. 

KRA would then be able using the AI-driven tools to flag suspicious activities and potential red flags in real-time, enabling teams to nab cheats. 

Experts say AI can analyse vast amounts of data, make assumptions and provide predictions at a scale and depth of detail that is impossible for individuals and many organizations are eagerly exploring the use of AI tools for a variety of purposes. 

Furthermore, it can do so without the administrative limitations of a human workforce – reducing downtime, turnover, knowledge gaps, and costs. 

At its core, AI applies advanced analysis and logic-based techniques to interpret events, supplement and automate processes, and help organisations take effective actions.

The implementation of AI technology is expected to significantly improve KRA’s detection capabilities, as the system can analyse millions of data points and identify complex patterns that would be challenging for human auditors to uncover.

The cash-strapped National Treasury recently advertised a new top-level position focused on boosting revenue collection, as the government grapples with sluggish tax receipts and recent credit rating downgrades.

In a notice published by the Public Service Commission recently the Treasury is seeking to fill the inaugural role of Director of Resource Mobilisation.

The successful candidate will be tasked with “developing and overseeing strategies to enhance revenue generation,” the advert stated.

The move comes as KRA continues to lag in its tax collection targets, with the agency missing its goal for the last fiscal year by over Sh100 billion.

“The government is clearly feeling the pinch and is now getting proactive about shoring up its revenue streams,” said economic analyst Sarah Wangari.

Kenya’s fiscal woes were underscored recently when global ratings agency S&P downgraded the country’s credit rating, citing concerns over rising debt levels and the government’s ability to service its obligations. 

“This new resource mobilisation director will be under immense pressure to deliver results and help plug the holes in the Treasury’s budget,” Ms Wangari added.