Tax proposals contained in the Finance Bill, 2021 are unlikely to yield a significant increase in revenue in the financial year starting July 1, a parliamentary think-tank has said.
The Parliamentary Budget Office (PBO)— the unit which advises lawmakers on financial and budgetary matters — said that the Bill leaves out any new income tax proposals.
“Tax enhancement measures such as strengthening the audit function in the domestic tax department, enhanced scanning, resolution of tax disputes through alternative dispute resolution and fast-tracking the conclusion of cases before the Tax Appeals Tribunal do not address the structural issues that have contributed to the decline in revenues,” PBO said in a review of the Treasury’s 2021/22 budget and the Finance Bill, 2021.
The Treasury has recommended changes to the Bill to expand the definition and scope of the digital services tax (DST), enhanced the role of the Kenya Revenue Authority (KRA) in collections, and load excise duty on items such as nicotine substitutes and jewellery.
“Further, the proposals ... are unlikely to contribute to a significant increase in revenue as a share of gross domestic product (GDP),” PBO said.
The analysts said Treasury reforms have failed to address the primary course of dwindling tax heads such as income tax and VAT collections which can be attributed to a collapse of informal employment and multiple tax exemptions.
PBO said the Treasury has consistently set unrealistic revenue targets during budget-making process.
“On average, between 2015/16 and 2018/19 actual income tax collected was 13 percent below the target set in the printed estimates. Similarly, the actual tax collection from VAT, import duty, and excise taxes were on average about seven percent below the target set,” the analysts at PBO said.
The office said dwindling income tax and VAT collection were the main drivers of the decline in tax revenue as a share of GDP.
“The under-performance of revenue relative to economic growth has been one of the main drivers of the expanding fiscal deficit,” the PBO said.
The financial experts want the Treasury to move away from the usual revenue collection enhancement measures which have proved to be ineffective in increasing revenue over the last couple of years.
The National Treasury projects a total revenue collection of Sh2.039 trillion (16.4 percent of GDP) in 2021/22 of which, ordinary revenue will be Sh1.776 trillion (14.3 percent of GDP).
The targeted collection from income tax which accounts for about 50 percent of tax revenue is Sh835 billion.
According to the Treasury documents, the other main sources of ordinary revenue will be Sh473 billion from VAT, Sh241 billion from Excise Duty, and Sh119 billion from import duty.