Kenya increased its income from sources other than tax by more than three quarters in the previous financial year, as the government sought to diversify sources of revenue, a review of data by Nation Newsplex shows.
In 2016/2017, non-tax income increased 78 per cent from Sh99.1 billion to Sh176.7 billion, according to the 2017 Economic Survey. These figures also represented a 58 per cent rise from 2012/2013, when the government received Sh111.7 billion.
The increase was driven largely by increases in ministerial appropriations in aid, which doubled from Sh62.4 billion to Sh125 billion. These are funds that governments receive in the course of day-to-day operations, for instance by charging fees for various services.
The next biggest increase was in property income, which increased 56 per cent from Sh21.3 billion to Sh33.3 billion. Repayments from lending and on-lending increased from Sh2.6 billion to Sh4 billion.
Fines, penalties and forfeitures increased 13 per cent, from Sh2.2 billion to Sh2.6 billion. In the 2012/2013 financial year, the Judiciary collected Sh1.48 billion in revenues, In 2014/2015, the amount rose 42 per cent to Sh2.109 billion That was 85 per cent of the total amount received by the government in seizures, fines and forfeitures was Sh2.491 billion, according to the 2017 Economic Survey
These increase comes amid increased efforts by government to widen the tax base and increase the number of Kenyans paying taxes, which provided 88 per cent of government revenue in 2016/2017.
While 8.1 million taxpayers are registered in the Kenya Revenue Authority’s Personal Identification Number (PIN) database, 2.9 million actively pay tax, according to a KRA bid advertisement dated February this year. That comes to over a third (36 per cent). The taxman aims to increase the number of active taxpayers to 4 million by 2018.
“The problem about our taxation burden, particularly our income tax, is that falls on very few companies and very few taxpayers. It’s not easy to spread because most of our income comes from informal business, which is very difficult to tax directly,” Mr Owino says.
The vast majority of employment in Kenya is in the informal sector. According to the Kenya National Bureau of Statistics, 832,900 new jobs were created in 2016. Nine in ten of those, or 747,300 were in the informal sector, while another 85,600, about 10 per cent were in the formal sector.
As of July 20, 2017, Kenya’s ratio of tax to gross domestic product was 19.3 per cent, KRA described is described as second highest among all non-oil economies in Africa and the highest East Africa. 2015 figures from the World Bank also show Kenya’s ratio (16.3 per cent) to be the highest among members of the EAC.
However, Namibia had the highest ratio at 33.4 per cent, Seychelles had 28.3 per cent and South Africa 27.2 per cent.
Wealthy, advanced economies tend to have higher tax to GDP ratios. According to a 2017 report by the Organisation for Economic Co-operation and Development (OECD) titled “Revenue Statistics in Africa 1990-2015”, OECD’s 35 member countries have an average ratio of 34.3 per cent in 2015, while 24 Latin American and Caribbean countries, had an average ratio of 22.8 per cent.
According to Anzetse Were, a development economist, Kenya’s ideal tax to GDP ratio needs to be researched. “We need to know where we sit on the Laffer Curve, first then we can make a decision going forward,” she told Newsplex.
According to The Economist, the Laffer Curve shows that increasing the tax rates beyond a certain point results in lower tax revenues.
For a country of Kenya’s income level, 19.3 per cent is high, according to economist Kwame Owino. “For a country at our income level, that is very high,” Mr Owino told Newsplex. “In general, if you use that as a measure of efficiency, you have to conclude that KRA is a very efficient mobiliser of resources,” he said.
That view is echoed by the Overseas Development Institute (ODI), a UK-based think tank. “Given the economic and institutional constraints faced, tax effort in many under-developed countries, particularly in sub-Saharan Africa, looks reasonably high (even if the amounts collected are low),” the organisation wrote in a briefing note dated April 2017.
According to the ODI poor countries have low tax collection for a number of reasons. First, they have large informal sectors that are difficult to tax. Second, dependence on aid tends to decrease the incentive to tax, and third, there is a lack of government action that can incentivise people to formalise their businesses.
According to Mr Owino, many barriers, particularly in the form of costs and regulations, stand in the way of formalisation. Taking the example of a young student baking cakes for sale from her kitchen at home, he notes that the number of licences required and costs of renting a kitchen mean it is too expensive to formalise the business. However, if the rules were more flexible, allowing for frequent health inspections, but making it possible to bake from home, it might be easier to formalise the business, he says.
According to Ms Were, focus should be more on helping businesses do better before taxing them. “We can do more to support informal enterprise to become more productive and profitable and from there a push for formalisation and bringing them into the tax net becomes more feasible,” she said.
According to the ODI report, interest in strengthening local revenue systems increased with the enactment of the Sustainable Development Goals, because it was realised donor funding alone would be insufficient. One of the targets of Goal 17, Partnership for the Goals, is strengthening domestic resource mobilisation, which means improving the capacity of poor countries to collect taxes.
A number of measures recently enacted by government are likely to increase the amount of non-tax income collected. This year, the Central Bank of Kenya, which this year increased the fines to be paid for violations by banks from Sh5 million to Sh20 million.
People, referred to under the law as natural persons, who fall afoul of the regulations will be liable for up to Sh1 million, up from Sh200,00.