Review tax administration to address reconciliation issues

In 2014 the Kenya Revenue Authority (KRA) rolled out the iTax system. The main objective of the iTax was to create a sustainable tax system that could generate adequate revenues to finance public expenditure and also address issues of inequality, improve on tax administration, increase productivity and reduce economic distortions created by taxes by enabling taxpayers to register, file and undertake remittance online.

The system was also supposed to help eliminate direct contact between taxpayers and revenue authority staffs in a bid to reduce corruption loopholes. Additionally, the rollout of the iTax was meant to ensure timely update of taxpayers payment details in driving better tax report period and consistent to factors that shape the strategy implementation for future tax system.

Section 37 of the Income Tax Act requires an employer paying emoluments to an employee to deduct, remit and account for Pay As You Earn (PAYE) and at the end of the calendar year, employees and corporations are given six months (Jan-June) to file returns rrelating to tax paid in the preceding year. Section 38 of the same act provides that the provisions relating to deduction of tax shall be binding to the government.

It is worth noting that the rollout of the iTax system has helped taxpayers to make payments for their taxes, file tax returns online and more importantly it has ensured better utilisation of Persona Identification Number (PIN) assigned to each taxpayer which has increased tax compliance and consolidate payment of all taxes and levies.

The KRA has enlisted a number of commercial banks as tax collection agents. The bank accounts are linked to iTax system such that a taxpayer registered on the system when paying and declaring the same, the iTax accounts get reconciled automatically. However, this is not the case for national and county government entities. These institutions pay their taxes through the Central Bank of Kenya(CBK). The CBK as a regulator is not an agent of KRA in relation to tax collection and the bank account that receives taxes is, therefore, not linked to the iTax. As a result, tax returns filed by the national and county government entities on iTax get automatic default notices.

The problem encountered by the taxpayers as a result of the default is extreme enforcement adopted by KRA especially when requesting for tax compliancecertificate. Such incidencts do little to endanger trust and cooperation between KRA and many government institutions are in “default” as far as 2015.

As a result, manual reconciliations are done, against the aim of iTax system. Seven years since the launch of the iTax system reconciliations have been done up to 2015. The problem is made worse by frequent transfers of KRA officers dealing with those reconciliations. Since government institutions are collection agents of KRA in relation to Value Added Tax and Withholding Tax, the amount withheld is sent to CBK and the filing of VAT returns equally gives default notices.

These anomalies have affected the suppliers and employees working for these institutions since they cannot automatically get tax compliance certificate from the system. This provides an opportunity for them to walk into KRA offices, which increases probability of rent seeking yet the system was to reduce such kinds of interaction. There is a strong believe that iTax system was aimed at reducing human interaction to save time, resources and get rid of opportunity for rent seeking. Indeed, if there is an office in public service that compels government institutions not to pay their taxes through commercial banks, it should be alive to the fact those accounts belong to KRA and not the banks. The iTax system provides undisputable audit trails for all transactions.

While we are cognisant to the fact the National Treasury maintains single account in line with Public Finance Management Act, this should not be used to stifle the efficiency and effectiveness of the operationalisation of the iTax system in the national and county government entities.

It is ironical that the same government that is enforcing the implementation of the iTax is not enjoying the benefits of the system when it comes to tax remittance and accounting. In addition, the iTax being a system relied upon to give key statistics of various taxes, interests and penalties, might be giving wrong information due to accounts that have not been reconciled.

There is, therefore, an urgent need for the National Treasury, KRA and accounting officers to agree on how tax administration from the affected entities should be handled. The National Treasury should give a directive that taxes by the government institutions are remitted through KRA collection accounts for automatic reconciliations of the accounts or better synchronise the CBK collection account with the iTax.

KRA should also consider adopting risk-based approach to allow it to distinguish between compliant and non-compliant tax payers and so target its approach and resources more appropriately.

The authority should also engage extensively with the tax payers to advocate for change in the tax payment culture in addressing some of the sticky issues like those raised above.

Mr Opany is development communication specialist