Economy

Why taxman is counting on new ETRs to grow revenue

etr

A new model of Electronic tax register (ETR) machine for automatic transmission of tax data. PHOTO | LUCY WANJIRU | NMG

The Kenya Revenue Authority has backed the successful transition to new internet-enabled electronic tax registers (ETRs) as a first step towards making consumption the biggest contributor to taxes ahead of earnings by workers and businesses.

Commissioner for Domestic Taxes Department Rispah Simiyu says the taxman is targeting to push value-added tax (VAT) to become the top revenue generator in what appears to be in line with a policy shift signalled by President William Ruto late last month.

VAT, charged on consumption of goods and services along the supply chain, is currently the second largest tax vote after income tax.

“As it is now if there’s one tax head that every single person is paying is VAT. Even to a small child on products which are not exempt [VAT is applicable]. Everybody is incurring VAT,” Ms Simiyu told a virtual annual tax summit on Wednesday.

“Why then shouldn’t it be the tax head that performs the best? That remains a challenge to us… and it is a challenge that we are taking graciously.”

VAT, which is borne by consumers of goods and services at every stage of the supply chain when value is added, accounts for slightly more than a quarter of the government‘s ordinary revenue — made up of taxes, levies, rent of buildings, fines and forfeitures.

For example, VAT collections for the financial year ended June 2022 amounted to Sh523.10 billion, an equivalent of 27.72 percent of the Sh1.92 trillion ordinary revenue.

Excise duty, the other key consumption tax, raked in Sh252.09 billion. This means receipts from earnings by workers as well as companies, corporations and trusts — which reached Sh876.71 billion, or 45.71 percent of the government revenue— dwarfed consumption taxes by Sh101.52 billion.

The development comes after Dr Ruto said his administration will be looking at a tax policy where the super-rich contribute the highest revenue to the government followed by consumption ahead of salaries and sales made by traders.

“The economic principles of equitable taxation require that the tax burden reflects ability to pay. This is best achieved by a hierarchy that taxes wealth, consumption, income and trade in that order of preference. Our tax regime currently falls far short of this,” the President told lawmakers on September 29.

In a bid to enhance VAT compliance,KRA required businesses with annual sales of at least Sh5 million to install the ETRs, which give the taxman real-time access to invoices from August.

The transition from old machines to the Tax Invoice Management System (TIMS) has, however, met headwinds due supply hitches of the upgraded gadgets, prompting Times Tower to extend compliance to the end of November.

“We are going in a direction where it is not a question whether it [VAT] has been transmitted or not—what the taxpayer is seeing is what we are seeing,” said Ms Simiyu.

The new registers will be linked to KRA’s systems through the internet, allowing the taxman to scrutinise all deals at the trader’s point of sale in real-time.

This is an upgrade from the manual registers that store data on sales for scrutiny by the taxman after 30 days, creating a loophole for manipulation and evasion of taxes.

“It has not been a fast journey as we would have wanted it to be with that implementation date of August 2022 [because] there was still that challenge of availability of the devices in the market,” Ms Simiyu said. “As such, we have continued to very closely talk to our taxpayers as we continue to walk this journey together to ensure that then we don’t …penalise them in a situation where it is not their fault.”

Dr Ruto has directed the taxman to adopt a friendlier and more efficient tax system as part of his strategy to enhance compliance levels.

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