Kenyans, sophisticated tax system and peculiar habits

A few years ago, the chief executive of one of Kenya’s largest companies described Kenyans as having peculiar habits —a statement that rings true in both inspiring and confounding ways. It is our unique traits, for instance, that propelled mobile money to global success while similar systems elsewhere have struggled.

This same peculiarity is what makes us tear each other apart in social media debates but unites us in fierce patriotism when one of us faces external criticism. Just ask CNN. Truly, we are a peculiar lot.

These peculiar habits also extend to the country’s tax system—a sophisticated structure that struggles to resonate with the majority of its citizens. Every year, when the budget is read, the government announces plans to expand the tax base.

Yet despite these ambitions, the measures put in place firmly cement Kenya’s tax structure into what it has slowly become over the years – an elitist system.

Over the years, Kenya has built one of the most advanced tax systems in Africa, with robust international tax laws and a fully digitised filing platform, iTax. Initiatives like the electronic tax invoice management system (e-TIMS), introduced last year, aim to ensure accountability by linking expenses to taxable income.

In theory, these innovations are groundbreaking, reducing opportunities for tax evasion.

Read: How tax bills will reshape investment, compliance

Brilliant as they are, they have failed to significantly increase compliance with experts, placing Kenya in the category of countries that apply the greatest efforts in tax collection and get minimal returns. In 2023, only 15 percent of registered companies paid taxes, and just 6.3 million individuals and businesses filed their returns—a dismal figure in a country with a population of over 50 million.

Why does such a sophisticated system fail to capture more taxpayers?

To understand this, imagine visiting a remote village in Makueni and giving a young man struggling to fetch water a fancy German electric car. While well-intentioned, the solution misses the mark if he has no electricity to charge the car or the means to maintain it. This mirrors Kenya’s tax system: an advanced, sophisticated system that is ill-suited for the realities of most Kenyans.

Our sophisticated tax system seems disconnected from the reality that Kenya’s informal sector dominates the economy, accounting for over 80 percent of employment. Despite the sector's massive contribution to the economy, little effort has been made to integrate it into the tax base.

Each year, the government introduces more amendments that favour formal structures sidelining those who operate in informality.

Widening the tax base first requires aligning the tax system with our reality and simplifying it. Instead, tax laws remain overly complex written in convoluted language, that even seasoned tax experts often find confusing. Filing taxes through the iTax platform is no less challenging, even for seasoned tax experts.

The system is difficult to navigate, and because it relies entirely on internet access, is inaccessible to many. For those who do have internet, filing taxes competes with more appealing uses of their data, like entertainment and social media.

e-TIMS, which was meant to improve compliance by ensuring businesses accurately report expenses and income, has suffered the same challenge. Since its rollout, e-TIMS has only brought in an additional 113,000 taxpayers who were not already registered for VAT.

Instead of bridging the gap between those who voluntarily pay taxes and those who do not, e-TIMS unintentionally cemented the divide.

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Like many other measures Kenya has introduced to expand the tax base, the system overlooks the realities of small businesses, particularly those run from home, where financial record-keeping is often poor.

If Kenya is serious about expanding its tax base, it must rethink its approach. In making the tax systems accessible, some of the world’s most advanced tax systems, like those in the US and the Netherlands, still allow manual filing. While reverting entirely to paper forms is not necessary, simpler alternatives are essential.

Why not create a USSD-based system that allows Kenyans to file taxes using their mobile phones? Such a system could bridge the digital divide and make tax compliance more accessible to the millions left out of the current process.

Beyond the ability to pay, there are many reasons that influence compliance in taxpayers. A key reason, according to the experts is the sense of justice. If people feel they are being treated fairly, they are more likely to comply. Our tax system is often perceived as unfair both in its laws and its administration with many viewing it as favouring the wealthy.

For instance, there is a sense of injustice when the law exempts foreign employees working in EPZ who make up the senior management while taxing Kenyans working in the same entity earning far less.

Exemptions limited to those with deep pockets while none are offered to start ups and SMEs further foster this sense of injustice. Similarly, signing unnecessary tax treaties with tax havens resulting in tax leakages only compounds the situation.

How taxpayers are treated is equally important. The use of threats to ensure compliance often leads to opposition in the form of evasion.

Why Kenyans do not pay taxes is not just a legal or economic issue. It seems to be a psychological, sociological, political and possibly even a spiritual one.

Countries like the US have long recognised the importance of appealing to the hearts and minds of citizens. It is common to hear a character in an American movie say, “I am an American. I pay my taxes! I know my rights!” This sense of civic duty is deeply ingrained in the culture, contributing to one of the highest voluntary compliance rates in the world.

In Kenya, however, many citizens do not have this sense of civic duty. They do not see the benefits of their taxes and feel disconnected from the process. This lack of trust, coupled with the perception of injustice, fuels low tax morale.

To truly expand Kenya’s tax base, the government must meet citizens where they are: with fairness, simplicity, and a visible return on their contributions. Until then, we remain a peculiar lot- applying sophisticated solutions to the wrong challenges.

The government continues to push for the widening of the tax base using innovative tax collection methods without addressing the root causes of tax apathy. It is like trying to hammer a toothpick—no matter how hard you push, it will break.

The writer is an Associate Director, Strathmore Tax Research Centre. Email: [email protected]