Taxman to invest in real estate to bridge Treasury funding shortfall

Kenya Revenue Authority plans to enter into real estate development sector, as the taxman seeks alternative resources to compliment government funding.

Speaking before the finance and trade parliamentary committee, Treasury Cabinet Secretary Henry Rotich said this would make it possible for KRA to implement new initiatives aimed at enhancing tax compliance, which it currently cannot do, due to funds shortage.

 “The authority is considering alternative funding sources, including through property development,” Mr Rotich said in his presentation of KRA’s first quarter revenue performance to the parliamentary committee on Finance, Planning and Trade on Thursday.

The authority has hitherto relied on Treasury for funding, with the money pegged at a percentage of total revenue collected each year, otherwise known as agency fee.

Currently, KRA gets 1.5 per cent of the total revenue collected, which it uses for operations, paying staff and other development expenditure.

DECLINED TO OFFER BIGGER PORTION

The Treasury has for long declined to offer the authority a bigger portion of the revenues it collects yearly on behalf of the government, a move that has continued to threaten KRA’s financial position and may slow down collection of taxes.

“Discussions on funding have been ongoing over the years, with the objective of pegging KRA’s funding at 2 per cent of the revenue collected,” added Mr Rotich without giving any commitment on the same. This means that KRA is ideally entitled to about Sh22 billion, going by the current financial year’s revenue target of Sh1.12 trillion.

It, however, seems unlikely to get the amount, considering that it missed its first quarter revenue target by Sh17 billion, which is 6 per cent shy of its Sh267.0 billion target for the first three months of the current financial year.

According to last year’s  Auditor-General’s report for the financial year 2011/2012, KRA was allocated Sh10.1 billion by Treasury, or 1.65 per cent of the tax collections, in the year to June 2012 — up from Sh8.4 billion the previous year.

But swelling costs — led by wages, which rose to Sh8 billion from Sh7.3 billion — continued to run ahead of KRA’s revenues in the past four years to 2012.

The authority’s total costs stood at Sh11.8 billion in the year to June from Sh10.6 billion by June 2011, according to Mr Ouko’ report.

In the same period, the auditor general warned that KRA was in the red after posting negative results for four consecutive years, a trend that saw it wipe out more than Sh1.5 billion of accumulated reserves between 2009 and 2011.

It is perhaps on the backdrop of these uncertainties that KRA is seeking a self-reliant option by joining the lucrative real estate sector. It comes at a time when the taxman has rolled out ambitious measures to promote tax compliance, hence increase the overall revenue collected.

With little tax increments in this year’s Budget, it is hoped that the ongoing tax reforms and customs administration will help KRA meet the target to fund the bulk of government expenditure.

But it is not clear how KRA intends to get into property development, considering that previous audits have raised issues on how the authority has treated its parcels of land.

Last year, the Auditor-General revealed that KRA had omitted the value of eight parcels of leasehold land with buildings from the 2011/2012 financial statements.

He argued that KRA should have valued the land and indicated its value as a note in the balance sheets. He valued the parcels at Sh829,050,000 as at June 30, 2012.