Late last year, I happened to be in a panel discussing the issues raised in the BBI by Kenyans and upon getting to the issue of high tax burden, I was perturbed by the response given by one of the lawmakers on the panel.
The lawmaker confidently said the grievance should be picked up by the Kenya Revenue Authority (KRA) for implementation.
Now, this is a legal scholar of repute but oblivious to her constitutional mandate.
Tax policy design is a political discussion that starts with the Treasury proposing the various taxes the government intends to levy to finance the budget through the Finance Bill then Parliament approves, rejects or amends them, a process KRA stays out until the Finance Bill is passed into law through Presidential assent.
So, KRA comes in to strictly implement and enforce those tax laws passed meaning the taxman is principally a tax administrator and not a tax policy architect. Therefore, the issue about high tax burden is within the purview of the lawmaker and not KRA.
This monumental misunderstanding is so disastrous that even KRA themselves many times fail to draw that distinction when one reads their press statements. So, the question that begs is do our parliamentarians understand the full extent of their work? That situation gave a glimpse as to why Parliament has not bothered to pass the needed legislation that reverts the tax tribunal away from the Treasury (which appoints members who constitute the tribunal’s bench) back to the Judiciary in fulfillment of the Constitutional requirement.
I bring up the issue of KRA being a tax administrator and not a tax policy designer because there is public outrage after KRA started implementing the turnover tax on small scale businesses, but the outrage is being directed to the wrong party, its Treasury and Parliament that Kenyans should go after.
Let’s get into the discussion of the turnover tax. Over time, Kenya has moved from a low to a high tax burden country, yet the country faces the obvious need for more tax revenues to finance the expanding govt expenditure.
But since the current tax base is narrow with very high rates, there is need to bring in more people into the tax bracket and there is no other area than informal sector.
In Africa, the untaxed informal economy is estimated to be more than 40 percent of GDP as compared to OECD which is around 15 percent and 30 percent for Asian countries.
In Kenya, its estimated that the working population is more than 16 million yet only less than five million are active taxpayers who are in the formal sector making informal sector the main target to expand the tax base, reason we are seeing govt targeting the informal sector with turnover and presumptive tax.
The larger the size of the informal sector, the more challenging taxation becomes, and Rwanda has been an inspiration on how to target the sector.
Between 1998-2006, the Rwanda government introduced a simple and fixed flat tax of $40 per month in the informal sector and its tax collection grew threefold.
For Kenya with the turnover tax, it is charging three percent of gross sales/turnover on business income which doesn’t exceed Sh5 million per year.
Though the whole principle around introducing the tax - which is to spread the tax burden is in good faith, the structure of its implementation is bad.
The cardinal rule in taxation is that by making the tax process simple for taxpayers, compliance will be successful. But in the case of turnover tax ,KRA has made it complicated.
If the tech-savvy middle-class are finding the filing and submission of returns on i-Tax cumbersome what informs KRA that the 2.5 million small traders targeted by the tax will comply by looking for cyber cafes to file tax returns every month?
If the taxman wants to see high compliance, it should provide a platform where traders can simply file and submit returns via mobile text.
PAYE Tax Calculator
Note: The results are not exact but very close to the actual.
