The dilemma of tenants in tax war

The Kenya Revenue Authority (KRA) is heading into turbulence over what critics dismiss as a bid to make tenants spy on their landlords.

Faced with colossal financial commitments, the Treasury has slapped a Sh1 trillion revenue target on KRA for the current financial year. This is compelling the taxman to employ unusual means to achieve it.

After roping in athletes, KRA now wants tenants to furnish them with details of their landlords, which would enable them to compare the tax they remit with what they ought to have paid.

The details include the full name of the landlord, national identity card number, KRA Personal Identification Number, postal address and telephone number.

KRA also wants the physical location of the building, its name, estate, road or street, town, plot number, type of house rented and the number of building units. Tenants are also required to provide the number of bedrooms, the amount of their rent plus details of the bank into which they pay it.

KRA estimates it is losing billions of shillings to tax-evading landlords. Between 2007 and 2010, the sector experienced an average annual growth of 3 per cent, but there has not been a recorded corresponding growth in revenue.

Although there exists a love-hate relationship between many landlords and tenants, most of the latter are reluctant to comply with KRA’s request because they feel their landlords would increase their rent to recover the lost revenue.

“I can’t!” said Mariam Muthoni, a tenant in Roy Sambu, “my landlord will recover lost money through a rent increase.”

Financial analysts and KRA are keen to point out that the authority is not targeting landlords for new tax but is simply out to tighten the loose ends to net tax evaders.

“The issue is that many of them were not declaring their income,” said Nikhil Hira, a tax partner at Deloitte East Africa. “Basically, those that have not been paying taxes are evading tax, so this is the correct move by KRA. My issue is that they have taken so long to take this step.”

Initially, the government had targeted Sh733 billion in revenue, which was reduced to Sh716.9 billion in April, a decision that was informed by the supplementary budget estimates tabled in Parliament then.

But the Treasury was forced to revise the target upwards following a series of strikes by teachers, doctors and university lecturers who were awarded huge pay rises, all to be paid out in the current financial year.

And on Wednesday police heaped more pressure on the government with a go-slow that forced the Treasury to release Sh3.7 billion to calm the situation.

Signs that the Treasury was broke became apparent last week when Finance minister Njeru Githae borrowed Sh7.2 billion from Standard Chartered Bank to help buy the 15,000 biometric voter registration (BVR) kits.

The growing financial burden appears to have pushed the Treasury and KRA into panic mode. Early last month, the taxman sent out demand letters to several athletes asking them to pay their tax arrears.

Critics argue that although information on landlords is crucial, the approach of obtaining it is simplistic and could be an exercise in futility. “I have never seen my landlord. I only know the caretaker,” said Martin Wekesa, a resident of Umoja.

There is no law KRA could use to penalise tenants who fail to provide the requested information. But under the Income Tax Act tenants are obliged to provide information about their landlords if requested by the KRA’s commissioner-general in writing.

In this case, KRA argues that the advertisements in newspapers would suffice.

This week, a KRA official told the Business Daily that they were ready to pay up to five per cent of any rental tax arrears plus penalties to tenants or any individuals who provide information leading to the recovery of uncollected taxes. KRA is also promising tenants confidentiality for all information submitted.

There is also the possibility that the Finance minister could gazette new guidelines to tackle tax evaders that would include penalties for tenants who refuse to provide information about their landlords. Such rules, though, must be approved by Parliament.

In addition to facing reluctance among tenants and lack of a legal framework, KRA would have to be more creative to obtain information about some of their employees whom industry sources say form the bulk of landlords in Nairobi’s Eastlands.

Davis Adieno, an official of Development Initiatives Africa, argues that the taxman can only achieve the objective by employing more sophisticated methods.

“I’m glad KRA is zeroing in on landlords, but begging tenants to give details? Seriously? Who approved the construction plans? Aren’t these on record? Doesn’t the ministry of Lands have title deed details?” Mr Adieno said.

“A coordinated approach by KRA and an advocacy campaign to sensitise citizens on why they need to give landlord details would net these people in a month!”

Mr Hira also pushes for a more focused approach.

“At the moment the audit procedure is ad hoc and tends to focus on the same people over and over,” he said.

“Other parts of the world use a focused approach where they target specific industries on a rotational basis. This has had considerable success in the UK – I believe last year they targeted plumbers and carpenters and made some significant collections!”

However, a strategy paper seen by the Sunday Nation detailing how the taxman intends to smoke out tax evaders says they will obtain data about land ownership from the Lands ministry.

KRA will also obtain information from institutions, including Kenya Power and Nairobi Water Company, and their counterparts in other towns. Both companies have details of landlords of all houses connected with electricity and water.

Urban Tenants Association secretary-general Ephraim Murigu says the move by KRA to involve the tenants would result in further increases. “We have no problem with them getting the information, but they must use other channels,” he said.

Mr Murigu says they filed 300 cases with the rent tribunal in June this year against landlords who arbitrarily increased rent in reaction to Mr Githae’s budget speech announcing the new tax measures on rental income.

Some real estate agents have confirmed that some landlords have considered reviewing their rent upwards.

“Some know their tenants will provide some of this information to get back at the perceived oppression and are planning to recoup it through increased rents,” said an agent’s employee in Eastlands.

Mr Martin Sironka, a landlord in Umoja-Innercore, said he was reviewing the agreements with his tenants. And Mr David Githinji, a caretaker in Roy Sambu, said his landlady has sent letters to tenants notifying them of rent increase from January 2013.