KRA dips into red amid a financing row with Treasury

The verdict by the Auditor General that Kenya Revenue Authority is in the red is set to add to tensions between the authority and Treasury over the funding of the tax collection agency.

Auditor General Edward Ouko has warned that KRA will be unable to carry out its mandate as the agency continues to run beyond its means—wiping out more than Sh1.5 billion of accumulated reserves in the past two years.

Treasury has declined to offer the authority a bigger portion of the revenues it collects yearly on behalf of the government, a move that is set to worsen KRA’s financial outlook and slow down collection of taxes.

“The authority’s ability to carry out its mandate in the long run is therefore under threat,” said Mr Ouko in his first review of KRA books. “It is a matter of concern that the authority has in the past four years posted negative results.”

This saw it cut its reserves to Sh669 million in the year to June from Sh1 billion the previous year and Sh2 billion in 2009, according to the financial statement in the latest Kenya Gazette notice. It is estimated that KRA’s accumulated fund will fall into the negative territory in the next 14 months should it fail to get additional resources from Treasury—which owes it Sh2.9 billion from bonuses earned since 2004.

KRA reckons it could cut back on its upgrade plans to preserve funds in what could slow down collection of taxes—putting a damper on the country’s economic recovery and running of government operations, which heavily rely on the taxman for cash.

“We have been asking Treasury to increase our allocations without much success. We cannot even fully implement our programmes now,” said a senior KRA official who declined to be named for fear of being seen to disclosing details of talks with Treasury.

Treasury reckons that the compensation to KRA is adequate and is within international benchmarks, arguing that it’s also faced with additional budgetary needs that have forced the government to implement austerity measures in government and state-owned companies.

Treasury’s revenue for the first quarter ended September fell short by Sh30 billion and the shortfall has prompted the cabinet to order cuts on foreign trips, procurement of government vehicles, hospitality, furniture, stationery and publicity. The target is to save Sh5 billion.

The spat with Treasury comes amid a change of guard at KRA as Michael Waweru leaves after serving for eight years. KRA’s collection has more than tripled from Sh201 billion in 2003 to Sh635 billion this year.
Rising revenues are primarily a result of the KRA’s crackdown on “leakages”, which has included sacking crooked employees and installing security cameras to monitor illicit office deal-making.

Revenues have also been boosted by rising corporate profits and household incomes linked to economic growth, which has accelerated steadily under President Mwai Kibaki’s regime that took office in 2002 December from the corrupt Moi administration. And so naturally, the authority has been expecting more funding to grow this number and motivate staff—whom it has been unable to compensate adequately due to underfunding.

The taxman is entitled to a maximum of 2 per cent of the revenues it collects each year in what is called agency fees.

This means that KRA is entitled to a maximum agency fee of Sh14.6 billion in the financial year starting July from the Sh733 billion it’s targeted to raise, but this looks unlikely as KRA says the reduced economic activity will undermine tax collections.

In the year to June, it was allocated Sh10.1 billion by Treasury or 1.65 per cent of the tax collections up from Sh8.4 billion the previous year. But its swelling costs led by wages—which rose to Sh8 billion from Sh7.3 billion—have continued to run ahead of its revenues in the past four years. Its total costs stood at Sh11.8 billion in the year to June from last year’s Sh10.6 billion.
The authority is faced with pressure from employees for a salary review since the last one done in 2009. Compared to staff at Central Bank of Kenya and Retirement Benefit Authority, both under Treasury, KRA’s staff are said to be the lowest paid.

With little tax increments in this year’s Budget, the government is hoping that the ongoing tax reforms and customs administration will help KRA meet the target to fund the bulk of expenditure.

The government expects to spend over Sh1.2 trillion, with 61 per cent of that coming from taxes, which makes KRA’s performance central to government’s ability to finance its expenditure this fiscal year.
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