Leverage technology to avert tax loss and save that penny

Kenya Revenue Authority (KRA) has faced a tax collection deficit of approximately Sh280 billion in the just-ended financial year, reports have shown.

As the country and the world struggles with the ongoing Covid-19 pandemic, it is estimated that the global economy will shrink by up to 10 per cent. This will only serve to worsen this deficit.

To bridge this gap, there is need to embrace newer, more efficient systems and tools of revenue collection and administration, while evaluating the efficiency of the systems that have already been implemented. The Excisable Goods Management System (EGMS) is part of the tools that require evaluation to help ensure revenue shortfall does not grow from a gap to a chasm.

In 2014, KRA undertook a process to roll out EGMS. The tender to roll out the system was awarded to SICPA, a Swiss company. The system was supposed to improve on revenue collection from excisable goods. This effort was buttressed with the enactment of a new Excise Duty Act, 2015. The Act was intended to make it easier and simpler for taxpayers to comply while sealing previous loopholes.

The Excise Duty Act also broadened the excise base by introducing goods that are not considered ‘sin-goods’ such as soft drinks, bottled water, cosmetics and financial services into the excise bracket. Further reforms have been made with the gazettement of Excise Duty Regulations 2017 and most recently, the Excise Duty Regulations 2019.

All these measures and changes implemented in the last five years have been geared at broadening the tax base as well as sealing excise loopholes, such as non-compliance and illicit trade. Despite all the above efforts, the results have not been as expected, growth has been marginal and driven by increased rates as opposed to a widened base.

One of the biggest reasons for the disappointing results has been the process of implementation of the EGMS.

The process was protracted with many challenges, including allegation of corruption in the award of the tender, court injunctions by manufacturers and activists, all culminating in investigations by two separate committees of Parliament to establish the reason behind the various complaints.

Manufacturers have complained of lack of involvement and consultation in the roll-out of the process, the incompatibility of the system with some of their manufacturing and packaging environments and the high costs of the system they are required to bear. There has also been significant complaints on the efficiency of the system in eliminating or reducing illicit trade.

Robust system

The EGMS system was supposed to help the government monitor the production, distribution, sale and consumption of excisable products on a real-time basis by combining physical markers in the form of a tax stamp as well as leveraging digital technology in the form of data-matrix code, all backed by a a robust system.

The system would help consumers utilise the technology to verify products in the market as well as provide the government with market intelligence on the presence of any illicit products in the market.

As it stands, the anticipated growth in excise revenue has proven elusive. Consumer acceptance and use of the system is non-existent. Manufacturers in tobacco and alcohol sectors complain about the counterfeiting of their products, which sits at 15 per cent and 25 per cent in their estimates. There has been suspicions of supply chain leakages or counterfeiting of the stamp itself, especially after last year when the police found a consignment of ‘fake’ tax stamps in a manufacturing premise during a raid on a suspected tax cheat. All these point to a system that has not delivered on the expected metrics.

Covid-19 has fuelled contraction of the economy. It is about time the government evaluates the EGMS system and implements a system that can help improve excise tax collection.

Manufacturers are eager to work with government to implement a system that offers better opportunities for reduced illicit trade of their products. There is also an opportunity to reduce the number of physical markers in the market by merging the EGMS tax stamp with other markers, including the Kenya Bureau of Standards quality stickers.

With Kenya having one of the best IT capabilities in Africa, it is time to leverage the use of the technology solutions available and find those that drive efficiency. It is time to evaluate the capacity of local companies to work with the government to deliver cutting-edge solutions. This will not only grow local production and employment, reducing capital flight, but will also grow local skills and save the much-needed penny.

-The writer is a tax policy expert. Email: [email protected]