Kenyans should support the KRA’s move to broaden tax compliance

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The Kenya Revenue Authority (KRA) has ambitious plans for the next three financial years: the taxman is aiming to almost double the number of taxpayers to seven million, both by encouraging taxpayers to pay their fair share, blocking delinquent taxpayers from importing and exporting goods, and employing technological innovations from digital tax stamps to online payment systems to boost its revenue collection. According to KRA Commissioner General John Njiraini, the plan to broaden the tax base could net an annual average of Sh 2 trillion—funds which could go a long way towards accomplishing key policy goals including providing Kenyans with affordable healthcare and housing.

Significant shortfall in tax collection

The KRA’s plan comes as the tax authority is facing a sizeable shortfall. Even after the tax collection target for this fiscal year was lowered, the government body is bracing itself to miss the mark by as much as 20 percent. The value of the deficit may be as much as 6.6% of GDP, a particularly bitter pill to swallow when the National Treasury is hoping to increase the national budget by 7.5 percent. 

Many Kenyans might not see this as a serious problem, as everyone loves to hate on the taxman. former Vice President Kalonzo Musyoka even went on record encouraging Kenyans to exploit loopholes in the tax code to pay less to the KRA. Musyoka may have been speaking from personal experience: Kenyan MPs don’t pay tax on a large portion of their more-than-sizeable compensation, having removed a clause in the Finance Bill that would have increased their obligations to the public coffers.

The MPs are in good company. Echoing a broader trend in the developing world, at least 60% of Kenyans generating income reportedly do not pay taxes. In 2015, out of an estimated 20 million Kenyans earning taxable income, only 8.1 million were registered in the Personal Identification Number database. Out of that already-reduced number, barely 3 million filed their returns with the KRA.

The Kenyan state’s tax base is further sapped by rampant cross-border smuggling. Everything from donkeys to sugar makes its way across the country’s porous borders. This illicit trade allows substandard and dangerous goods to enter Kenya, encourages criminal gangs, and costs the government millions of shillings a year. Some traders along the border don’t see the problem with the smuggling epidemic, arguing illicit trade offers ‘employment’ to youth who become involved with the smugglers.

Revenue earmarked for worthy projects

The tax revenue collected by the KRA, however, is designated for essential services for Kenyans. The critical initiatives grouped together under the government’s “Big Four” development agenda all require significant investment.

Among them: some one million affordable housing units are set to be built over the next five years, with 1.3 million manufacturing jobs created in the same time frame. Universal healthcare coverage is expected to be rolled out to the entire country by the end of 2019, now that a pilot programme has provided 3 million Kenyans with free medical care since December 2018. At the same time, the government is forking over enormous sums to furnish hospitals with modern equipment and grant stipends to previously unpaid community health volunteers. It is also trying to radically boost the production of key agricultural staples such as maize, rice, and potatoes, in order to address the food insecurity impacting one out of three Kenyans.

Unfortunately, in lieu of capital injections from a robust tax regime, the Treasury is being forced to hunt for funds elsewhere. This financial year, the government is set to borrow some 306.6 billion shillings from foreign sources, while extracting a further 271 billion shillings from the domestic market.

High taxpayers working against the KRA

No matter how vital the public initiatives in need of funds, it seems the super-rich and companies on the hook for a high tax burden will undoubtedly fight tooth and nail to stop the KRA from implementing reforms and plugging tax leaks.

Kenya, for example, has a model system for cracking down on illicit trade and tax evasion in the tobacco and alcohol industry, known as the Excisable Goods Management System (EGMS). The mechanism relies on tax stamps with a QR code to track goods throughout the supply chain, and has so far been successful in reducing counterfeiting and boosting tax revenue.

The International Monetary Fund highly commended the system in a 2017 report, while other countries are taking notice; India has been studying the Kenyan scheme in preparation for rolling out a similar system. KRA data shows that domestic excise revenue under the scheme jumped by 43 percent in 2015/16 compared to the previous tax year.

Industry representatives have also made note of the EGMS’ success, fearing it will cut into their profits. The KRA plans to extend the scheme to include non-alcoholic drinks, an initiative which will net 3.6 billion shillings in revenue, but Kenya’s mammoth sugar industry has been pushing back and delaying the scheme’s implementation.

The expansion of the EGMS was set to be an uphill battle from the start. Kenya’s sugar cartels make a killing from the country’s illicit sugar trade. Untaxed sugar is robbing Kenya of billions of shillings of much-needed revenue, while adding to a public health burden the cash-strapped government cannot afford to address.

With the sugar lobby and other powerful forces doing everything they can to avoid paying tax—a report last July named Kenya as one of the world’s biggest tax havens—it is no surprise the KRA is missing collection targets. Will the tax authority’s new plan be the missing link to collect the taxes Kenya needs to fund its future? The Treasury can only hope so.