Kenya has increased its use of tax amnesties as a tool to enhance tax collection, improve overall tax compliance, and widen the tax net, most recently by introducing the Voluntary Tax Disclosure Programme.
Under this programme, a taxpayer voluntarily declares any historic tax liabilities for the years 2015 to 2020 to the Kenya Revenue Authority (KRA). The taxpayer then obtains the benefit of not having to pay, under certain conditions, the resulting penalties and interest.
As of January 2022, the KRA indicated that it had collected Sh5.9 billion in taxes from 6,690 applications. A total of 13,918 applications for disclosure had been made in the same period.
Kenya is not alone in using tax amnesty as a tool for improving tax collection and compliance. Governments have, particularly in times of recession or when public expenditure is growing quickly, encouraged taxpayers to remit past undeclared taxes by offering amnesties.
Generally, economists believe that taxpayers choose a level of compliance by weighing the trade-off between the comfort of compliance and the penalties imposed on tax evaders and choosing a level of compliance that provides the most optimal level of net benefits.
Therefore, one of the ways through which governments can improve compliance is by enhancing enforcement and increasing penalties for tax evasion.
Therefore, questioning how effective a tax amnesty programme can be is important. While a tax amnesty programme may increase tax collection and improve voluntary compliance by a few percentage points, these benefits could be short-term and may place the government in a position of having to offer amnesties regularly, defeating the very purpose of the amnesty.
In addition, where enforcement measures are weak, making non-compliance likely to remain undetected, the uptake of tax amnesty programmes will typically remain low.
A tax amnesty programme, therefore, cannot operate alone to change the taxpayer’s behaviour and improve tax collection and compliance. For an amnesty to be effective, it must be supported by heightened enforcement measures.
In addition, the legal and economic environment should make it unprofitable to evade tax.
Other strategies to improve voluntary compliance include taxpayer education, programmes to improve the tax culture by promoting simplicity and transparency.
The KRA has become increasingly vigilant and is now actively using technology, including blockchain and social media monitoring tools to support collection strategies. In addition, the KRA Investigation and Enforcement Department, supported by the Directorate of Criminal Investigations carries out continuous surveillance, investigation, and criminal prosecution.
Penalties on tax avoidance, deliberate defaults, and fraud have been enhanced while the probability of getting tax exemptions and waivers of penalties has been narrowed.
The combined effect of these efforts by the KRA is that there is now an increased likelihood of detection of tax evasion, audit, punitive penalties, and criminal prosecution on the same, and, therefore, an increased incentive to take up the programme.
In addition, taxpayers who have outstanding liabilities due to genuine errors are opting to tax advantage of the opportunity to declare unpaid taxes and avoid penalties, increasing the effectiveness of the programme.
Taxpayers have until December 31, 2023, to take advantage of the voluntary tax disclosure programme, although the percentage of penalties and interest being remitted is now reduced to 50 percent and 25 percent in the year 2022 and 2023 respectively.
The increased vigilance by the KRA is likely to improve the uptake of the programme and secure long-term benefits in terms of overall compliance despite the KRA having published limited data on the success of the amnesty programme.
A tax amnesty is one way to improve collection from the informal sectors of the economy, however, its benefits are short-term.
The government must demonstrate tangible results in bringing Kenya’s shadow economy into the tax net, whereas policymakers should focus on the bigger revenue gain that comes from policies that enhance voluntary compliance even where the government offers no tax amnesty.
Lina Omole, tax senior manager at Deloitte East Africa
