KRA, Treasury at odds over taxman bid to retain 2pc of tax revenues

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 could escalate tensions with the National Treasury, which has been pressing the agency to improve its revenue collection efforts.

Despite consistently missing its targets, KRA believes this proposal could provide a crucial lifeline for enhancing operational efficiency and meeting the ambitious goals set by the Ruto 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 two per cent of the previous year’s revenue,” KRA stated 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,” the KRA disclosed.

Operational costs

Critics within the 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 the National 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.

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 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, 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 emphasized 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 mobilization efforts,” 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.