Why Kenya needs to overhaul its tax collection system

As the government’s cash flow slowdown unfolds, the Kenya Revenue Authority (KRA) has been in the spotlight, especially after revelations that it missed first quarter revenue target by Sh28 billion.

The latest publication of the statement of actual revenue and net exchequer issues now show that KRA collected Sh203 billion in the first quarter, which was a 10 per cent year-on-year drop from the Sh227 billion collected in a similar period of the previous fiscal year 2014/15.

But I think this tax collection issue needs to be looked at broadly, and I would like to do so in two ways: first, the income and corporation tax, which contributes half of total tax receipts has some serious gaps. Recently, I was shocked to learn that there are only 1.6 million active tax payers, including corporations.

I don’t have the exact figures, but my back-of-the-envelope calculations suggest that payroll tax payers could account for up to 90 per cent of this total active base.

If you compare this to the 2.4 million formally employed population (persons with regular income), it means the tax penetration rate among employed persons only is still less than 100 per cent. And if we rope in persons engaged in informal ventures, then the penetration gap is much wider.

This thin income tax base should be a worry. I don’t know whose onus it is, between the government and KRA, to ensure the deepening of this penetration.

Additionally, the rising unemployment also exacerbates the situation. Latest statistics show that the economically active age population in Kenya (persons aged between 18-59) is at 17 million. If viewed against the 2.4 million formal employment figures, then the future of labour market, as well as payroll tax collections, is quite grim.

Finally, the issue of tax evasion will remain prominent for a long time, and I just want to raise one pertinent issue on this one; there is something that has been unearthed from the recent seizure of Dubai and Imperial banks—that of individuals holding huge sums of money in their bank accounts, and even the CBK governor this week pointed out that a large number of Dubai Bank depositors are yet to come forward, with some Sh1.3 billion still unclaimed.

I would want to see KRA seeking to be enjoined in some of these court cases with a view to performing a tax audit on some of the names involved to establish if the tax they pay is a true representation of their income levels, both at the individual and corporation level.

Second, customs tax collections, which account for about 10 per cent of total tax receipts, also need a revamp. I looked at the container traffic at the port of Mombasa vis-à-vis import duty figures, over a 10-year period (2004 -2014) and, as you would expect, the latter indeed has outpaced the former in growth, but the margin is very small, which is quite an interesting phenomenon. There has to be a strong positive correlation here because the country is not importing air.

Either this rise in container traffic is attributable to transit containers and/or the import duty tariff regime has materially declined. Both cases are highly doubtable.

My overall point here is -the income and corporation tax base isn’t growing while at the same time, customs receipts aren’t growing at the same pace as import traffic.
There is definitely a much bigger issue here and it’s difficult to point a finger solely at KRA without touching on fiscal policy planners as well.

Mr Bodo is an investment analyst, @GeorgeBodo