Cut spending instead of setting KRA dicey target

Times Tower, the headquarters of the KRA, in Nairobi. FILE PHOTO | NMG
Times Tower, the headquarters of the KRA, in Nairobi. FILE PHOTO | NMG 

I am of the view that revenue generation targets are unrealistic, informed mainly by finding ways to cater for the government’s ballooning expenditure rather than any realistic economic dynamics.

Over the past few years, revenue collection has fallen short of the targets, but it should be noted that the Kenya Revenue Authority (KRA) almost reached targets despite the constraints they face.

For example, in the year just completed (FY 2016/17) total revenue collection stood at Sh1.365 trillion, representing a performance rate of 95.4 per cent.

However, the shortfall was Sh66.64 billion—a significant number. The KRA said last Thursday the latest target was Sh1.376 trillion.

Although the inclination is to blame the KRA for under-performing, I am of the view that KRA is given unrealistic targets each financial year(FY). These targets seem more informed by aggressive increases in government expenditure and seem oblivious of the serious issues that mute tax collection.

The first issue is that revenue generation targets tend to be revised over the course of the year.

KRA’s original revenue target for the FY2016/17 was Sh1.415 trillion, which was revised to Sh1.431 trillion, an increase of Sh16.24 billion. This is a concern because motivations behind increases in targets are not clear.

Is the increase due to a realisation in Treasury that it cannot raise as much as anticipated in borrowing and thus they place pressure on the KRA in the form of increasing revenue generation targets?

The second is that the macroeconomic environment informs the extent to which targets deviate from forecasts. For example, it is estimated that a one percentage point reduction in gross domestic product growth reduces revenue by Sh13.4 billion.

In terms of inflation, a one percentage point increase in inflation requires that revenue targets be raised by Sh13.0 billion to cater for the value of money lost due to inflation. Thus macroeconomic dynamics inform the extent to which KRA can hit targets.

Thirdly, government policy decisions particularly those related to tax policy affect the ability to generate revenue.

The non-implementation of tax policy in terms of the adjustment of specific excise rates in FY 2016/17 did not occur, negatively impacting revenue generation by Sh4.911 billion.

Additionally, the duty free importation of essential foods (maize, milk, sugar) led to a revenue loss of Sh4.363 billion in the fourth quarter. Indeed, it is estimated that government policy decisions cost Sh13.006 billion in revenue generation in the FY 2016/17.

Fourthly, government itself is to blame; delays in remitting income tax from public institutions costs Sh823 million.

Finally, sectoral issues inform the ability of KRA to collect tax. For example, declining profitability among large firms where 16 NSE- listed firms issued profit warnings in 2016, had an adverse impact on corporation tax.

Additionally, the downsizing and shutting down of firms, which resulted in over 7,000 staff lay-offs in various institutions, mainly banks, adversely affected Pay As You Earn (PAYE) performance.

It is time that revenue generation targets were informed by the dynamics elucidated above. If this does not happen, government will continue to be seen to be trying to buffer itself from its aggressive expenditure through creating unrealistic targets rather than submitting austerity budgets that limit unnecessary spending.

Ms Were is a development economist