The electronic tax invoice management system (e-Tims) that the Kenya Revenue Authority recently rolled out is touted to be the game-changer in tax administration. It allows VAT-registered traders to connect real-time to the KRA database using any technology, including mobile phones.
By pushing for the introduction of this new technology, President William Ruto has stood by his clarion call: to collect every collectible shilling. Technology with the potential to double the VAT revenue yield is most welcome, but there is more to this technology. Taxes impose some incidental costs on society, making them even more punitive.
Adam Smith, the father of modern economics identified three costs of taxation, administrative costs, compliance costs, and tax evasion costs. E-Tims has the potential to reduce these costs.
Adam Smith had this to say on tax administration costs: "The levying of a tax may require a great number of officers, whose salaries may eat up the greater part of the produce of the tax, charging another additional tax upon the people." A lot is spent by KRA on recruiting new taxpayers and pursuing defaulters.
E-Tims technology requires limited human interaction and is expected to be foolproof, meaning it will lower default rates. The new intervention is simplified to improve the user experience, reducing the need to train taxpayers. It will also create a pool of information that can be used to support audits for other taxes, significantly reducing the need for field audits.
Taxpayers incur compliance costs in the process of paying taxes. This ranges from the cost of installing equipment, paying tax experts, and litigation costs in case of a dispute. E-Tims addresses compliance costs by first eliminating the need to acquire equipment. The system generates its own documents hence reducing the need for tax experts. Compliance costs frustrate voluntary tax compliance, especially for SMEs.
Tax evasion is the most painful cost of taxation and e-Tims promises to eliminate it. Tax evasion cost is the loss incurred by those who unsuccessfully attempt to evade taxes.
Adam Smith notes that ‘By the forfeitures and other penalties which those unfortunate individuals incur who attempt unsuccessfully to evade the tax, it may frequently ruin them and thereby put an end to the benefit which the community might have received from the employment of their capitals’.
A competent tax authority should not create a porous tax system and then punish evaders but rather should make evasion impossible.
Tax-collecting agencies are duty-bound to protect taxpayers from yielding to the temptation of evading tax. The e-Tims mechanism is designed to quench the temptation to evade taxes. The technology loops all buyers and sellers in one continuous chain, thus there is no chance of tampering with documents since they are relayed in real-time to the KRA database.
The e-Tims disruption is a win-win for tax administrators and taxpayers.
Faustin Mwinzi, Lecturer, KCA University