Taxpayers rattled by Treasury's threats on payment delays

CS Henry Rotich caricature

Cash-strapped and desperate, President Uhuru Kenyatta’s Government is now lunging at everyone in its path and emptying their pockets in a frantic bid to finance the country’s expansive budget.

Last week, Cabinet Secretary Henry Rotich read a budget statement which painted a picture of a cash-hungry Treasury willing to mobilise revenue by every means, even hitting hard innocent taxpayers who might have a genuine explanation for delaying to file tax returns.  

A poor man who toils from dawn to dusk for a peanut salary - just enough to send some upkeep cash for his family in the countryside via M-Pesa and be left with a little to light his shack with a tin lamp - has not been spared Mr Rotich’s wrath.

In a classic case of raiding the pockets of persons who are in dire strait, the Government has ruthlessly increased taxes on mobile money transfer fees and kerosene, two items that are essential for poor households who are already smarting from high cost of living.

Rotich also wants to raid mama mboga, jua-kali artisans and kiosks through a presumptive tax of 15 per cent that will be factored into their business permits.

This new measure will see Treasury rope in 1.56 million licensed micro, small and medium establishments (MSMEs) and 5.85 million unlicensed businesses in the country, according to findings in a survey by Kenya National Bureau of Statistics.

Unfortunately, these are businesses that are already struggling to survive and any new tax measures could see the already alarming rate at which they collapse, currently at 46 per cent in the first year, go up.

This could pose a serious threat to economic recovery, which Rotich badly needs to boost his dwindling revenues.

A trader roasts green maize along Ang'awa Avenue in Kisumu on June 14,2018. New tax measures have increased focus on low-income earners. (Denish Ochieng/ Standard)

Punitive measures

With a mountainous budget of Sh3 trillion and fast running out of options to tax, Treasury has resorted to punitive measures to ensure compliance, reading the riot act to Kenyans who have a penchant for lateness in filing returns.

In his budget speech, Rotich said promoting tax compliance among taxpayers is key to boosting revenue mobilisation efforts to avail the much-needed funds for supporting the ‘Big Four’ plan.

So desperate for quick cash is Treasury that it gave an additional Sh4.3 billion to the Kenya Revenue Authority, with the latter promising to squeeze from taxpayers an extra Sh74 billion between January and June, 2018.

In March, Rotich warned KRA against missing income tax collection targets, noting that Treasury had given the tax authority everything they needed. He promised to personally visit tax collection centres.

“We have given them the mandate to collect revenues and they have to deliver,”  the CS said at a press briefing, adding that the Government had played its part by adding KRA more personnel and procuring scanners to nab excise duty cheats, along with rollout of Integrated Customs Management System (ICMS) to seal leakages.

“I’ll personally be visiting collection points to ensure whoever is not working to deliver our targets will face the wrath of Treasury,” he said.

Clearly the Government is trying to send signs to the market that they are working on necessary adjustments that the economy needs to honour international commitments and keep up with social policies, which are essential for political stability.

But how did Kenya’s huge coffers some years back suddenly end up needing urgent cash?

It was not always this dire. Kenya’s economy was booming under former President Kibaki’s regime, which funded 95 per cent of its programme using local resources.

Mega projects

Then in 2013, Uhuru picked from where Kibaki left, sponsoring mega projects and the start of the devolved system of government did little to help the situation. 

Rather than cut spending to make up for declining tax revenue, the Uhuru administration went the other way. It borrowed money.

Like most governments, Kenya preferred to borrow money through the sale of bonds and syndicated loans. The country would take investors’ money and promise to pay the money back with interest. Investors liked the deal because they could earn the super interest.

From a modest debt level of Sh1.7 trillion in 2013, Kenya’s debt level has since grown to Sh5 trillion in just six years.

Now Rotich wants more cash, the debt funding source is becoming complicated and he must now rely on tax revenue to lessen the effect of borrowed cash.

And by June, the taxman had only done half target tax collection but Rotich is still hopeful that his tall order will be achieved even as the bulk of the entire revenue is eaten up by recurrent spending - pensions, salaries and wages, interest payments and debt redemption.

“By April 2018, KRA had collected Sh33 billion and we expect them to deliver the remaining revenue yield by end of June 2018,” said Rotich when he presented his annual budget last week.

But it is his plan to increase late payments penalty by 20 per cent and increase interest on unpaid taxes by one per cent to two per cent that has got most Kenyans shaking in their boots, with most observers fearing that the Government is so desperate to raise funds that it will stop at nothing.

This has sparked outrage from companies doing business with the Government, attributing delays in remitting the taxes to the Government’s slow payments for the goods and services it procures.

Dorcas Maina, owner of a small business in Nairobi, says that firms which do honest business with Government and have no connections to rush through payments go for months and even years before they are paid.

KRA, however, requires them to declare taxes factoring all transactions in their books even though they still have to wait before the actual income hits their pockets.

In fact, the State delays payments for so long that 10 per cent of the country’s stock of bad loans (Sh28 billion) is a result of late payments by the national and county governments.

Ms Maina said if the penalty and interest are to be charged, then businesses will either have to go into their pockets to settle the tax and penalties to pay the same Government that has withheld their funds, or close shop because of unpaid tax arrears.

“Remember the value the money loses while payments are delayed. Then you are required to bribe if you want it to be rushed, this is unsustainable. No wonder businesses are closing shop,” she said.

And it is not just businesses that Rotich wants to punish for late tax payments. Individuals who delay filing their returns will also find very little room to get a reprieve from paying penalties, even if they have done an error and need to amend or experience downtime on the Internet-based iTax system.

The penalties, which stood at Sh1,000 three years ago have been hiked to Sh20,000 per person and will hit a huge chunk of taxpayers if they do not file returns in the next two weeks.

“We have noted that a number of taxpayers are filing returns without payment of the taxes due. I am, therefore, proposing to amend the Tax Procedures Act to increase the rate of late payment interest to two per cent, and also introduce a 20 per cent late payment penalty,” Rotich declared.

He added that this will promote tax compliance and boost revenue mobilisation.

And then there is the increase of tax on kerosene. Audit firm PricewaterhouseCoopers (PwC) said while the decision to increase taxes on kerosene is good news for owners and operators of vehicles and machinery who have historically suffered higher maintenance costs as a result of fuel adulteration, the poor will be hurt by the fresh measures.

“However, these actions will increase the cost of living for low-income households who still rely on kerosene for lighting, cooking and heating, after the rise in the cost of charcoal and firewood following the recent logging ban,” said PwC.

Last year, a litre of kerosene averaged Sh67 but is now above Sh84.

Although expenditure on kerosene by the poor in Nairobi is negligible compared to other consumer products in the cost of living index, demand for the commodity has been on a surge.

In 2017, 448,000 tonnes of kerosene were consumed, a 20 per cent increase from 372,000 tonnes consumed in 2016.

But Rotich has spotted yet another cash-cow, and he has charged heavily against mobile money transactions. Money transactions are an unbelievably lucrative easy funding avenue for Rotich to resist.  

In 2016/17 financial year, the value of mobile money transactions by six mobile money transfer services were a whopping Sh4.6 trillion with 44 per cent of these transactions, about Sh2.05 trillion, being person-to-person.

As at April 2018, KRA had collected Sh132.2 billion in excise taxes compared to Sh134.6 billion, according to data from the Central Bank of Kenya (CBK).

Although there is no breakdown of how various activities contributed to the total excise duty, past figures show that levies from financial transactions contributed an average of 14 per cent of the total collected.

Besides mobile transfer services such as Safaricom’s M-Pesa and Airtel’s Airtel Money, digital credit providers have also joined the fray of mobile money.

Some of the digital credit services are offered by the four largest banks - KCB, Equity, Barclays and Co-operative Bank. There has been also a growing number of fintechs and non-bank institutions.

Digital credit

The latest Financial Sector Deepening report that captured the supply of digital credit in Kenya notes that providers have developed different models to score and deliver credit to customers.

“The largest players M-Shwari and KCB M-Pesa partnered with the largest telecommunication provider (Safaricom) to score customers and manage loan disbursements and repayments through the M-Pesa platform,” the report notes.

On its part, Equity Bank established Equitel and utilises a combination of bank account data and credit bureau data to score customers. Fintechs such as Branch developed a stand-alone smartphone app that collects phone usage information to score customers.

M-Shwari has already disbursed over Sh230 billion loans since inception in 2012 while KCB, the largest bank by asset size, now provides 90 per cent of its loans through the M-Pesa platform.

Betting firms have also been hit with late payment punishment to nudge them into complying and hand Treasury the money to support sports, arts, cultural and social development activities.

“In order to ensure compliance and prompt payment of taxes, I propose to introduce a 20 per cent penalty and two per cent interest on late payment of tax in the Betting, Lotteries and Gaming Act. This will enhance the collection of these taxes,” said Rotich.

Besides late payments, Treasury has also set sight on money generated by regulators that is not remitted to its purse.

Rotich said that in the 2015, he exempted regulatory authorities from payment of corporate taxes and provided that they remit 90 per cent of their surplus to the Consolidated Fund.

Kenya has numerous authorities including Kenya Bureau of Standards, Communications Authority of Kenya, the National Environmental Management Authority, Capital Markets Authority and the Insurance Regulatory Authority.

However, various authorities have not been consistent in remitting the surplus to the Treasury.

Collect surplus

“In this regard, I propose to amend the Kenya Revenue Authority Act and the Public Finance Management Regulations to allow Kenya Revenue Authority collect the surplus from the regulatory authorities and remit it to the Consolidated Fund,” Rotich said.

The Government is also desperate for money stashed overseas and is willing to set aside all etiquette on corruption to convince the fat cats to bring the cash back home.

In 2016, the Tax Procedures Act was amended to provide tax amnesty on income declared for by a person who earned taxable income outside Kenya.

This was, however, not taken up and in 2017 and Rotich extended the period for applying for amnesty.

“Despite the extension, the uptake of amnesty has been low partly due to concerns that when the monies are returned, questions will be raised regarding the source as required by Financial Reporting Centre,” he said.

Treasury has decided to extend the amnesty with no questions asked to encourage uptake of the amnesty .

“I propose to provide that funds transferred under the amnesty shall be exempt from the provisions of the Proceeds of Crime and Anti-Money Laundering Act or any other Act relating to reporting and investigation of financial transactions, to the extent of the source of the funds,” said the CS.

This would fly in the face of the recent intensified fight against corruption but the Government would rather have the money than the moral high ground.

Rotich has also pulled a surprise by going after foreigners to tax charges by shipping lines for delay to load or offload cargo.

He has proposed amendments to the Income Tax Act to subject payments for demurrage charges made to non-resident persons to withholding tax at a rate of 20 per cent.   

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