Why Kenya Revenue Authority fails to meet its tax targets

Kenya: One year later and another budget statement is in the offing.  In some ways, the position the Treasury Cabinet Secretary finds himself in is similar last year’s.  Revenue collections continue to struggle against set targets but have risen year-on-year.  The economy has not grown as much as we would have liked.

So, why are we unable to meet our targets?  It is clear that year on year; we do see increased collections - a tribute to improvement in the operations Kenya Revenue Authority (KRA). It does seem that the targets set annually, and next year will be no different or are unrealistic. They are derived from high government expenditure, which shows no sign of abating. Economic conditions, insecurity, lack of infrastructure and corruption certainly play a big role in not attaining revenue targets.

However, one key factor that is generally ignored is that our tax code and short-term policy making perhaps plays even bigger role. Railway Development Levy (RDL) is an interesting one. Introduced last year to raise funds for the railway project, it has undoubtedly been a runaway success. Indeed it is the only tax that has consistently exceeded target in the last year. Of course, what this shows is our reliance on imports. The point however is that we extended it to all goods imported for home use, regardless of what they are and what their intended use is.

Two particular ones that have or will be negatively impacted are donor funded aid relief and the airline industry.  The application of the levy to goods brought in for aid relief seems to me, to be a misnomer.  We are obtaining aid relief and then promptly taxing it. 

Most donors are unwilling to pay local taxes and the effect will simply be to reduce their donations by diverting them elsewhere. The levy also applies to the purchase of aircraft; aircraft spares and leased aircraft components. These are high value items with huge financial implication to aviators. It extends to jet fuel for local or domestic flights. 

However, this is only applicable to local airlines. The result is increased operating costs for local airlines, making them uncompetitive at a time when we are trying to boost tourism.  I would estimate that the national airline is paying millions of shillings in RDL, which clearly cannot be good for them or the country.

The aviation industry cannot survive this in view of increased pressure to borrow in order to finance payment of VAT and RDL. Perhaps, we will see the introduction of an Airline Development Levy soon?

My wish – remove the Railway Development Levy which has served its purpose. Personal tax bands have not changed since 2005 despite us having gone through periods of high inflation.  In real terms disposal incomes have probably declined. When you add to this the additional burden of increased VAT and the impact of RDL, you can perhaps appreciate why people our complaining.  A widening of the personal tax band is imperative and long overdue.  My wishes – widen the personal tax bands significantly but please don’t introduce a higher rate of personal tax.

I continue to believe that the engine of future growth for Kenya will be the SME sector.  They will undoubtedly create the employment opportunities needed and thereby create wealth and growth.

— By Nikhil Hira is a Partner Deloitte East Africa. The views in this article are the author’s and not necessarily the firm’s.