Meeting tax target could help plug budget hole

Today, the Kenya Revenue Authority will be marking the end of its financial year, closing one of the busiest months for the agency as it receives millions of tax returns from the public.

But for the over 4,600 tax collectors, and the government, Thursday last week will remain one of its historic days in the recent past as the authority clocked past the Sh1 trillion mark in revenue collection.

In an email sent to the authority’s employees, KRA Commissioner-General John Njiraini noted that the tax collection has outpaced last year’s by 13 per cent.

“History was made this week when KRA surpassed the one trillion shilling exchequer revenue collection. As of Wednesday June 24, 2015, conventional exchequer revenue stood at Sh1,002.3 billion,” Mr Njiraini wrote in an email sent to staff.

“I wish to appreciate the efforts of all who have made this historical achievement possible.”

The Sh1 trillion is five times the amount collected in the first year of former President Mwai Kibaki’s government (Sh201 billion). Mr Kibaki’s regime is credited with improving tax collection, a move aimed at reducing reliance on donor financing for budgetary expenditure.

MARKET PREDICTIONS

Between Wednesday last week and close of day today, KRA will probably have collected the Sh70.5 billion it needs to beat this year’s tax revenue collection target set at Sh1,070.5 billion. This gives the national government hope that next year’s budget set at Sh2.1 trillion, with revenue projection of Sh1.25 trillion, could be financed without creating havoc in the money market by over-borrowing.

The revelation beat the market predictions of a miss in this year’s target, largely based on the fact that the 2014/15 budget was mainly a tax neutral, pegging the growth in revenue collection to increase in economic activities and strengthening of administrative measures. The economy was projected to grow by 6.5 per cent.

The two drivers however suffered in the year performing below expectation, with the economy powering at 5.3 per cent in 2014 with some of the administrative measures announced also facing setbacks both at the National Assembly and at the corridors of justice.

CAPITAL GAINS TAX

For instance, the capital gains tax reintroduced this year was jinxed from the start, at least as far as trading of shares and bonds went. The stockbrokers resisted the introduction of the tax saying it would slow down the market.

Trips to High Court and lobbying both the National Treasury and Members of National Assembly saw the tax, which had been set at 5 per cent, replaced with a flat rate of 0.35 per cent.

However of interest to analysts and the general public will be details on the magic the taxman employed to beat the target when he releases the full year performance early next month.

As late as June 11, the government did not seem to have much faith in meeting the revenue target. National Treasury Cabinet Secretary Henry Rotich told Parliament in his budget speech that challenges in taxing the big corporates and receding customs revenue from oil imports due to low fuel imports and falling oil prices would hurt this year’s target.

“Revenues remain lower than projected mainly due to administration challenges of large income taxpayers and customs due to reduced oil imports following increased production of geothermal energy,” Mr Rotich said.

The payoff could, however, have come from the successful re-introduction of the capital gains tax on land, enactment of income tax regime for the extractive industry and more importantly, introduction of VAT withholding of six per cent out of the 16 per cent, as well as the rolling out of iTax.

In an earlier interview Mr Njiraini noted that it was not the money the agency was interested in requesting for the six per cent withholding tax but on the information that would help KRA in tracking non-compliance. For the iTax, the fact that the number of taxpayers filing returns online has now grown to almost two million could be a success on its own.

The people, who have logged on to the system, have been amazed by the amount of information KRA already has on them. Many are caught by the six per cent withholding tax. They are presented with undeclared income when they file their returns.

The adoption of the technology is likely to be a game-changer in tax collection. The current plan to link iTax with other government agency database, such as land registry, could see the rate of compliance with tax payment shoot up.

A number of tax laws are also coming up for review while new laws are being enacted to simplify and ease compliance and tax remittances.

These are the Excise Duty Bill, Tax Procedure Bill and review of the Income Tax Act. A new Income Tax Act will be ready by September.

“By 2018, the tax regime in this country will be nothing you have seen before,” Mr Njiraini told Smart Company in February.

In the spending estimates approved by the National Assembly days before budget was presented, the government allocated Sh1 billion to KRA “for the tax modernisation and revenue administration reforms covering digitisation of revenue collections, implementation of a Customs Management System, enhanced taxpayer recruitment and education programme, strategic tax audit and risk profiling, and a simplified tax regime for the informal sector”.

It is this knowledge that saw the National Treasury set a bigger target at Sh1.25 trillion for next year’s revenue collection.
“This performance will be underpinned by ongoing reforms in tax policy and revenue administration,” Mr Rotich noted.