Controversy stalks airtime, banking, money transfer taxes as KRA cuts revenue shortfall

When the National Treasury scrapped the value added tax (VAT) on mobile phone handsets in June 2009, a number of tax experts questioned the ingenuity of letting a possible growth area of the economy off the hook.

Data gathered at the time by audit firm Deloitte however shows the move precipitated a ‘revolution’ as handset purchases soared 200 per cent that fiscal year.

That tempo has never changed; and the Treasury is apparently earning its dividends back as nearly every Kenyan spends on airtime.

The excise tax on airtime grew by 13.4 per cent to reach Sh14.9 billion in the year to June 30, the Kenya Revenue Authority’s (KRA) 2015/16 year-end performance report shows.

The figures come just weeks after the Communication Authority of Kenya released its first quarter data showing that mobile subscriptions hit 38.3 million at the end of March.

It is estimated that an increase of 10 mobile phones per 100 people translates to Gross Domestic Product (GDP) growth of up to 0.6 per cent per year. Studies also indicate that people at the bottom of the pyramid (low income earners) tend to overspend on airtime.

Experts say the 10 per cent excise duty on mobile phone usage is counterproductive as it burdens the poor rather than sharing out the weight with rich households.

“This form of tax is regressive,” said Deloitte East Africa tax director Nikhil Hira. “Generally, it is unusual to levy taxes on services but in Kenya we have the levy on money transfer, banking and airtime usage,” he added in an interview with the Business Daily.

However, according to the KRA financial statements the excise tax on airtime outperformed the Sh9 billion that the taxman collected from a similar levy introduced on financial services a few years ago.

“The recent introduction of the 10 per cent excise tax on airtime may not have dampened the mobile phone usage so far because there has been a compensating tariff fall, but you can be sure the affected firms are not generating enough to invest on development,” Mr Hira pointed out. He added: “If the government believes that mobile phones have a role to play in the economy, then it will have to rethink the tax on services.”

Earlier lobbyists had used the same argument to block a proposal by a taskforce led by former Kenyan assistant minister Kilemi Mwiria which sought to raise billions of shillings for free primary education by taxing mobile airtime and fuel.

Apart from airtime, the KRA raised Sh9.01 billion from the excise levied on bank services, a growth of 57.5 per cent over the previous year.

READ: KRA sees difficulty in Sh1.4 trillion election year target

Generally, KRA collected Sh1.211 trillion just Sh6 billion below the Treasury target. The taxman collected a total of Sh810.3 billion from domestic sources with payroll and VAT remains the largest components.

The government netted Sh312 billion from formal sector workers (Pay As You Earn) while other incomes grew by a modest 7.9 per cent to Sh246.6 billion.

“There was shortfall in corporation tax,” KRA commissioner- general John Njiraini said on Wednesday as he released the 2015/16 financial statement.  “As we indicated from the beginning of the year, there were signals from the business community that business was not performing as expected.”

The taxman generated VAT worth Sh159.4 billion from domestic sources over the period and another Sh131.5 billion from imports.

The domestic VAT performance represents a 23.3 per cent growth over the previous fiscal year as a number of zero-rated items came under the tax bracket while the import VAT fell 3.1 per cent over the period.

The figures show that despite the taxman’s attempt to simplify its rental income tax, collection from landlords remained flat at Sh2.03 billion.

Treasury Cabinet Secretary Henry Rotich last June introduced rental income tax chargeable at a flat rate of 10 per cent aiming to collect Sh10 billion annually.

The tax, which became effective January 1 as a simplified form of an earlier one was meant to curb default.

The collection of rental come did not grow even after the KRA extended amnesty to landlords who have defaulted from 2014. The taxman had hoped to raise Sh3 billion from the amnesty alone.

A look at the KRA financials however indicates a notable growth in capital gain tax collection. Mr Rotich made peace with stock brokers last year by shifting the task of paying and accounting for the tax to the Nairobi Securities Exchange (NSE) investors.

The KRA collected Sh3.8 billion in the year to June 30, representing a 499.3 per cent increase form the previous financial year.

Earlier, a row between NSE brokers and the KRA over who should account for the tax delayed the levy which was to take effect from January 1, 2015.

The KRA wanted the brokers – rather than the investors – to account for the tax which is collected at the rate of five per cent of the share sale profit to be submitted to the taxman by 20th day of the month after the transaction.

The taxman is nursing a disappointment after its effort to modernise its revenue stamps last year failed to translate to improved collection. Stamp duty collection hit Sh10.4 billion, a 10 per cent drop over the previous season. 

The new generation excise duty stamps for beer, mineral water, juices and soft drinks were aimed at choking counterfeit products out of the market. The taxman had hoped to raise Sh17 billion in the move that saw the prices of the excisable items rise under a revised Excise Duty Act.

And in spite of Kenya’s many free trade pacts with its neighbours and bilateral partners, customs and border control levies grew by 7.7 per cent to reach Sh386 billion, the KRA financials show.

The railway levy - which is collected at the rate of 1.5 per cent on imports – however fell by 8.8 per cent over the period to Sh17.3 billion.

The Economic Survey 2016 shows that imports generally dropped by 4.5 per cent from Sh1.618 trillion in 2014 to Sh1.578 trillion by December 2015.