Why revenue collection targets are far-fetched

By Nikhil Hira

Nairobi,Kenya:Huge deficit: The pressure on revenue collections is going to persist and in turn put more strain on taxpayers, will also increase.

The budget estimates depict, interestingly, that once again we are looking at less revenue than recurrent expenditure. The estimates target Sh880 billion of tax revenue, Sh39 billion of non-tax revenue, Sh67 billion of grants and Sh296 billion of loans being generated in 2013/14.

If you pull the trusted calculators out folks, you will see that there is a shortfall of Sh281 billion to fund our expenditure budget of Sh1.63 trillion.  The balance it seems will come from loan rollovers.

I focus here on the tax revenues that are proposed to be collected which make interesting reading.  The actual take this year which after 9 months stands at Sh560 billion and which will undoubtedly be below target for the full year is indicative of how hard it going to be to meet the 2013/14 targets.

The estimates assume that we can achieve Sh723 billion by the end of the financial year, which translates to a 22 percent increase next year.  The question that must arise is how achievable Sh880 billion tax revenue is.  Statistics indicate that over the last few years we have only achieved revenue growth of between 12 per cent and 15 per cent.

The immediate reaction is that it will be very unlikely to meet the proposed target in 2014. The economy, while not completely in the doldrums, has certainly taken its fair share of knocks over the last few months. The uncertainty surrounding the elections had substantial impact on various sectors of the economy and those shocks will not vanish overnight.

For Kenya to get back to the heights of 2007 and even higher is going to take longer than the next 12 months. Realistically it will take two or three years for our economy to take hold and start bouncing back. That economic growth will be recorded is perhaps in less doubt than before 4 March - it will however just take some time.

Clearly an underperforming economy is going to impact tax collections and indeed Kenya has seen that this year. The additional revenue will not magically appear - Kenya will need a booming economy and above all greater enforcement of tax laws.  There is to my mind a clear fallacy with the idea that increasing audits by the Large Taxpayer Office is going to increase the tax take.  Repeatedly auditing the large taxpayers - and we have been doing that - is only likely to result in a marginal increment in the collections.

There is also to my mind a fallacy that large taxpayers are evading or perhaps aggressively avoiding tax.  What they are doing, by and large, is to plan their affairs in such a manner that they minimise their tax liabilities. 

There is nothing wrong with that unless they are evading tax.  We need to look at more than just the corporate tax that these companies are paying and remember that they are creating employment and generating various other tax revenues.  We must also remember that the SME sector is rapidly becoming a force to reckon with and it is clear that they too are coming clean.  The focus must be on the untaxed and those deliberately evading tax. The current renewed emphasis on landlords to pay rental tax is a good starting place.

Turning to the specifics, the revenue estimates target an increase of 20 percent over the expected outcome of this year for both PAYE and corporate tax.  It is interesting that PAYE in fact did increase 19 percent from 2011/12 to 2012/13 and when one factors in pay increments and the increase in minimum wages announced on Labour Day, a 20 percent increase next year might just be achievable.  A similar increase in corporate tax is, to me, at least a touch optimistic for the reasons I mentioned earlier.

That ‘Very Annoying Tax’ – VAT – is set to increase by a miserly 13 percent, which I must confess surprised, me.  The fact that Treasury is anticipating such a small rise is to my mind attributable to two potential reasons.  Firstly, given that it is a consumption tax and the economy is not as buoyant as it might be means that VAT collections will be lower.  Secondly, does the fact that the percentage increase is so low suggest that the VAT Bill is not going to become an Act any time soon?

But there is a more interesting point on VAT contained in the estimates which suggest that VAT refunds in 2012/13 amounted to Sh12.9 billion and next year they are set at Sh14.7 billion.  By all accounts it seems evident that the current level of outstanding VAT refunds is in excess of Sh25 billion. The message seems to be that over the next 12 months there will not be a significant dent made in the backlog.  This is clearly not going to be well received by the business community.

Excise duty is targeted to increase by 25 percent. This may partly be on the assumption that the measure introduced in the last Finance Act on money transfers and bank fees will take full effect.  It could also mean that the traditional sin taxes will be further increased – so smokers and drinkers be aware. Import duties are projected to increase by 15 percent.

Overall my immediate reaction is that we are once again targeting the unachievable as we have done several times over the last few years.  The pressure on revenue collections is unfortunately going to persist and in turn the pressure on you, dear taxpayer, will also increase.

The views expressed in this article are the authors and not necessarily those of Deloitte East