Kenya’s tax revenue mobilisation has failed to keep pace with its relatively fast economic growth rate, raising concern over the country’s revenue collection buoyancy.
This is an indication of the degree to which money collected responds to changes in the overall economy, says a global lender.
In its latest economic update, the World Bank takes issue with Kenya’s tax buoyancy, pointing at a steady dip in revenue-to-GDP ratio.
“A buoyant tax system has an elasticity with respect to growth in nominal GDP of at least one. However, the buoyancy of Kenya’s main tax categories, namely income tax and VAT, is much weaker," says the 2018 World Bank Kenya Economic Update released last week.
The report says the trend in Kenya’s tax revenue mobilisation suggests that the country’s capacity to mobilise more revenue could be flatlining and vouches for consideration of structural reforms to remedy this anomaly.
KPMG’s Associate Director for Tax and Regulatory Services Robert Waruiru argues that structural hurdles in this regard are characterised by Kenya’s growth engines.
“It is useful to note that in Kenya, the biggest GDP growth driver has been government spending on infrastructure.
“This likely impacts the informal economy (through avenues such as job creation), which doesn’t translate to a corresponding growth in tax revenues. Another key GDP growth driver is agriculture — again a majority of the people employed by this sector are bottom of the pyramid, therefore not yielding significant tax revenue growth”, said Mr Waruiru.
However, he observes that the Finance Act of 2018 with its focus on widening the taxman’s streams through indirect taxes marks a step in the right direction as far as addressing this situation is concerned.
“The Finance Act, 2018 has expanded indirect taxes, which are more economical for government to administer and more importantly, they have a wider reach, principally because they are based on consumption. The challenge for government is striking the balance between taxing the poor and broadening the tax base through indirect taxes,” he says.
Viewed through a regional prism, whereas Kenya still tops the rank with regard to tax revenue-to-GDP ratio, available data from the Uganda Revenue Authority shows that the country’s (Uganda’s) ratio has grown steadily having stood at 12.3 per cent in 2014/15, 13.5 per cent in 2015/16 and 14.1 per cent in 2016/17, boding well for the neighbouring economy.
In the financial year 2017/18, Kenya mobilised a little under Sh1.4 trillion in ordinary revenue, the category that includes taxes, reporting its worst performance rate in five years at 91.6 per cent.
Year-on-year growth in ordinary revenue also stood at 4.5 per cent compared to 13.3 per cent and 11.7 per cent in the financial years 2016/17 and 2015/16, respectively.
Reversal of this is necessary especially as the government looks to keep its debt uptake in check whilst aligning its expenditure to a more prudent fiscal path.