We are awaiting for full-year 18/19 tax collection numbers expected later this month or next month.

Going by the 11-month tax collection so far, it appears Kenya will record one of the poorest actual receipts Vs budgeted numbers

Would like to get your insights on the below:

  • What do you think informs Kenya’s poor tax collection for the 18/19 fiscal year?

There are two ways to look at this, one would be to compare the actual taxes collected over the years and in that cases the 2018/19 projected collections would not be termed as poor since it’s the largest collection in the last 4 years.

Secondly is a comparison between the variances on the budget and the actual figures collected we would still not term it as poor. In 2016/17 the difference was -111.1 billion, 2017/18 the difference was -117.2 billion and the estimated difference for 2018/19 is -110.7 billion according to the Economic Survey 2019.

Keeping in mind the above statistic, the tax collected in 2018/2019 would not be termed as a poor collection but rather an overly ambitious budget by the treasury. Over the last 3 years the variances between the budget and the actual revenues have been on an average of slightly over 100 billion. The government increased their budget estimates without putting in place clear and practical ways on how to raise the extra revenue estimates.

Over the years, the main focus at Treasury has been on direct taxes such as PAYE and consumer taxes, mainly VAT. Direct taxes are, however, not effective in the informal sector where majority of Kenyan taxpayers earn a living. Therefore, without clear measures on how to net such individuals, growth in revenue collection is hampered.

The economy has been stable in terms of growth, however there have been fewer jobs created leading to higher unemployment figures. The government ought to be deliberate in creating a sound environment where businesses can grow and thrive. The multiplier effect in this is that employment opportunities will be created and this leads to an increase in direct and consumer taxes.

There were reports in the last fiscal year of companies downsizing and having to lay off employees. This was caused by non-payment by government which is the largest consumer. The unsupportive move by banks, refusing to lend to small and medium enterprises in protest of the interest cap on loans. This, of course, resulted in losses by businesses and laying off employees. The direct impact on taxation was that direct taxes and consumer taxes declined.

  • What explains the cut in tax projections, and the expected missing of targets, in light of the new taxes (VAT on fuel, higher mobile money excise, duty on all financial services) introduced by the Budget last fiscal year?

The taxes introduced last year or the increase on rates are more of consumption taxes. The danger with consumer taxes is that they are only successful when consumption is high. If consumers do not have enough purchasing power, such taxes will not be viable since consumption of such products is lower. In the past year, the Kenyan economy has been unfriendly to small and medium businesses. The rate of unemployment has been high and, due to some of these taxes, the cost of living has been at an all-time high thus reducing the ability of individuals to spend.

The government, in its usual style introduced these taxes with the aim of increasing revenue, but failed to realise that the success is pegged to the money flow in the economy. Direct taxes and consumer taxes cannot be increased in isolation without considering the performance of the economy. Such taxes are popular with governments as they are easier to implement and cheaper to monitor in terms of compliance.

The informal sector in Kenya is largely untaxed and this will go on if KRA does not change its tac and strategy on how to tax the sector. There needs to be a more practical approach in dealing with the informal sector that will be more appealing unlike the turn over tax and presumptive tax which have been unsuccessful.

  • What’s your outlook in terms of tax collections, with recurrent expenditure and debt obligations eating huge chunk of it?

We expect tax collection to increase in the fiscal year 2019/20. We are yet to fully realize some of the measures put in place in the last fiscal year and as such that will take effect in this fiscal year. In this year’s budget we have seen Treasury increase tax rates and also introduce various taxes on some products. The increase is found in the higher capital gains tax, the excise duty on betting transactions and the traditional increase of excise duty on cigarettes, wines and spirits.

However, even if tax collection increases it will not have an impact on the Kenyan economy. Recurrent expenditure is estimated to be at 84% in the year 2018/19 of the budget which essentially, is a crisis.

This has been fuelled by, among other factors, poor human resource policies as well as Kenya’s governance structure. Kenya is largely overrepresented in the public sector including the political class, which has led to duplication of roles in various government institutions.

With Kenya being a developing country, there needs to be higher budgetary allocation to infrastructure, healthcare, education, housing, water supply and many more sectors which give a direct boost to the economy.

Due to limited development funds, government has resorted to sourcing for funding of development projects from international sources. Unfortunately the loans have been marred by allegations of corruption and lack of prudence in the management of the borrowed funds including overstating the costs of the projects.

Government must protect tax collections and this would be by reducing the recurrent expenditure, increasing the budgetary allocation on development while ensuring all funds are used for the intended purpose as well as improving the business environment to encourage entrepreneurship and growth in small and medium enterprises.

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  • Andersen Tax has found a home in Kenya and provides a wide range of tax, valuation, financial advisory and related consulting services to individual and commercial clients.

  • Andersen Tax has found a home in Kenya and provides a wide range of tax, valuation, financial advisory and related consulting services to individual and commercial clients.

  • A tax return is a form or forms filed with a tax authority that reports income, expenses, and other pertinent tax information. Tax returns allow taxpayers to calculate their tax liability, schedule tax payments, or request refunds for the overpayment of taxes.