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Taxman has to be innovative as harsh economic realities sink in

Tuesday September 18 2018

 Kenya Revenue Authority

Times Tower, the headquarters of the Kenya Revenue Authority, in Nairobi. The taxman has put on the radar over 50 high-net-worth Kenyans and is demanding more than Sh10 billion in tax arrears from them. PHOTO | FILE | NATION MEDIA GROUP 

ROBERT SHAW
By ROBERT SHAW
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Economic realities have cast a long shadow over Kenya’s political and social landscape in the past few weeks. The 16 per cent value added tax on petroleum has dominated it as fuel prices rocketed and public outrage erupted. This, in turn, triggered a wave of price increases with the unwelcome inflation repercussions.

President Uhuru Kenyatta’s intervention by halving the VAT, coupled with some cost-cutting proposals, has calmed the waters for the moment.

But it remains to be seen whether he has furthered or just postponed dealing with the country’s fundamental economic structural imbalances and disequilibrium.

The government spends more than what it earns and borrows the balance, adding to our mounting domestic and international debt.

LOCAL REVENUE

Local revenues cover only two-thirds of the national Budget. In short, the government cannot pay its way on a day-to-day basis, which also means development plans are largely stillborn unless started on borrowed money.

The national and county governments must increase revenue and reduce costs to at least reduce the yawning gap. The President’s proposal is a partial stab at both but will only work if it is the start of a series of measures not a fudged attempt at a temporary solution.

Whether it is an IMF demand or not is neither here nor there; it is a basic rule of prudent housekeeping. Where the IMF becomes an issue is when we do not abide by its guidelines.

BORROWED MONEY

In this case, it results in a double hit. We lose the options of standby facility, which is a welcome safety net, reducing our overall financial standing, meaning borrowing could become costlier and more cumbersome.

The negative by-product of this economic predicament is that there is little or no space for serious developmental spending. Some valuable priority projects are not implemented and those that do are weaned on borrowed money and done in a go-stop fashion.

Lofty-sounding projects and agendas become piles of paper of intent rather than anything of actual reality unless borrowing is involved. But a caveat is in order here: The borrowing window is starting to get smaller as it is increasingly overused and, in some cases, misused. Our overall debt portfolio is becoming uncomfortably large.

TIGHT ECONOMIC ENVIRONMENT

The ‘Big Four’ is a noble idea in terms of where our priorities should lie but how will it fare in the increasingly tight economic environment, where revenues are low and borrowing is getting more difficult?

The strategy must be to carry out an action plan on both fronts: Cut costs, waste and corruption and instill efficiency while raising revenues.

The former should be based on the various productivity audits and the templates used. This is a common practice throughout the world in both the public and private sectors.

The difficulty here is that we do not have enough capacity within government per se. There is an additional factor — within the government hierarchy, there is an inert bias against auditing oneself for obvious reasons.

PRODUCTIVITY AUDITS

But there is plenty of spare capacity and skill externally for the productivity audits. As with fighting corruption, there are several willing development partners who would assist with the skills and the relevant resources to do this.

One way to look at it is that our taxes are only getting half the value, mainly because of the malaise within the central and county governments.

We have all experienced it and, indeed, been victims of it. Getting things done in the public sector is akin to pulling out teeth. I recently sought up-to-date rate demands. Several of the payments had not been posted and it took a morning of going through the paperwork that I provided to ascertain the correct figure.

The corruption purge is work in progress and it is too early to expect its benefits to filter through. It should be followed through to the criminal conviction of the miscreants.

INCREASE REVENUE BASE

A concurrent action should be increasing the revenue base of government. Applying or increasing VAT is an easy, but arguably overused, resort.

The government needs to expand and broaden its tax base to cover more activities of the formal and informal sectors. Inevitably, this means dramatically increasing the administrative capacity of KRA and the finance departments.

An interesting statistic would be how much of potential taxes are not collected through tax avoidance and evasion.

There is an urgent need for a makeover of the financial management capacity of the national and county governments. They are like a series of fishing boats with nets that have gaping holes in them.

Mr Shaw is an economic and public policy analyst:[email protected]

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