Columnists

Tax collection in a digital era

kra

Times Tower. FILE PHOTO | NMG

Some say the Kenya Revenue Authority (KRA) is “pitiless” or “unfeeling” to hard working citizens.

There is no time in the history of tax collection in Kenya that we have described the tax agency using such choice terms.

The descriptions are misplaced. In an increasingly digital economy, the agency is simply finding new ways of responding to the emerging revenue needs and sometimes they make mistakes too.

KRA wants to be more efficient. While Kenya’s debt to GDP has soared to 57 percent this year, tax to GDP has however been declining from 19.1 percent in 2014 (the highest ever) to 18.1 in 2018.

In comparison, the average ratio for 21 African countries and Latin American countries was 18.2 and 22 percent respectively in the same period.

When tax collection declines and government debt increase, the alternatives are often severe to investors and sometimes counterproductive to economic expansion. In the past few years in Kenya, the government has been borrowing heavily to the detriment of Micro, Small and Medium enterprises (MSMEs).

Most of these MSMEs have not had access to affordable credit. Sometimes due to high paying treasury bills, there is no credit at all since banks will have no appetite for lending to risky ventures when there is a risk-free opportunity in government.

In effect, the rich tend to get richer at the expense of the poor leading to a widening income disparity.

In my view, we all must cooperate if the country is to deal with development issues. First, KRA builds capacity taxing digital economy to improve efficiency, the Government cuts unnecessary expenditures, and citizens, including investors, agree to comply with tax obligations without coercion.

In this article, I will focus on tax collection efficiency. Although it easier said than done, it can be done in this digital era if the government encourages digitization of the entire economy.

As the Internet of Things and its next phase, the Internet of Everything, gains acceptance, you either adapt or simply die. There are no choices as new business models spread across the world.

I am aware that KRA has made significant investment in modern tools such as the Integrated Customs Management System (iCMS), Scanners at customs office and Regional Electronic Cargo Tracking System (RECTS) but this is not enough.

Research by McKinsey reveals that there are four innovations reshaping tax administration across the world. These are: digitised interactions, advanced analytics, process automation, and talent management.

In digitised interactions, tax authorities will seek to have 360 degrees view of the taxpayer or as McKinsey research says, “an integrated view of the taxpayer, which involves implementing an integrated account-management system required to digitize large volumes of taxpayer interactions.”

KRA has been successful at this in especially taxing income earned from saving in banks. The agency could do better especially in introducing blockchain whose core attributes (transparency, control and security) have a huge potential for use in tax collection.

For example, in retail, there is no need for tax authorities to wait for the retailers to aggregate the tax before remitting. With blockchain, it is possible that all taxes from retail can be collected instantaneously, thus reducing the temptation to manipulate taxes due.

Similarly, for state owned agencies that receive capitation from government, there is need to embrace programable currency where the institutions’ tax obligations cannot be used for any other purposes but for remitting to the authorities.

We can effectively use this digital era to change our indiscipline in financial management.

With huge data generated from digital interactions, it is imperative for tax agencies to embrace analytics as the McKinsey report says to transform how they conduct examinations and debt collections, using analytics to create early warning systems and practice extreme modeling.

KRA, for example, must learn from the fast-growing mobile money lending platforms to determine the extent of audit appropriate to every taxpayer.

McKinsey research says that many tax agencies have been investing in process automation especially with “e-filing, automatic data checks, automatic reminders, call center interactive voice response, and so forth….however, the combination of new analytics and machine learning with robotic process automation is enabling a whole new wave of capabilities that increase productivity dramatically.”

Most have simply focused on automating internal processes and less on external processes where they can gain more in understanding external audiences.

To be able to deal with all these emerging strategies for tax collection, tax agencies must develop human resources capacity and be able to retain them.

More often, salaries in state agencies are not sufficient to retain talent leading to a high turnover that undermines overall organizational performance.

There is a chance for KRA to be productive and friendly.