Why taxman keeps missing revenue targets

Tuesday August 23 2016

PHOTO | FILE Times Tower, the headquarters of the Kenya Revenue Authority. An auctioneer who sued Kenya Revenue Authority over unpaid commission has told a court the taxman short-changed him after he helped the government reign in a rogue tax debtor.

Times Tower, the headquarters of the Kenya Revenue Authority.  NATION MEDIA GROUP

By EDWIN OKOTH, @EdwinCowino edokoth@ke.nationmedia.com

When the Kenya Revenue Authority announced revenue collection of Sh4.1 billion above the target in 2011, the Treasury was understandably convinced the taxman was on top of its game.

However, the impressive figures did not last. The authority fell a cool Sh10 billion below target the following year. And the taxman was far off the target in 2013 having missed the mark by a massive Sh85.9 billion.

From then on, the common story about KRA has been that of missed targets with the latest shortfall being Sh6.5 billion.

The persistent failure to meet revenue projections has come with far-reaching ramifications for the economy. The country has been compelled to borrow heavily from the local and international markets, a scenario that has partly sparked the current row over controlling lending rates. Banks, struggling to obtain deposits, have been raising the cost of loans to stay afloat.

Because of the huge budget deficits, the Treasury has been disconcertingly piling debts and by May it had surpassed its annual domestic borrowing target by Sh49.2 billion with net domestic borrowing touching Sh446.6 billion.

How is it possible that a largely manual KRA, with fewer taxpayers, less economic activities, and fewer income sources was able to surpass the target by such a high margin in 2011? Was the Treasury target too low? Have the country’s top economists been setting unrealistic targets for KRA?.

Smart Company’s efforts to reach Treasury Cabinet Secretary Henry Rotich for answers on whether the taxman is currently grappling with impossible targets or is simply sleeping on the job were fruitless.

Tax experts contend that KRA has left crucial economic segments outside the tax bracket and stuck to a few overburdened traditional payers.

Independent audit, tax and advisory firm Grant Thorton’s Director of tax Samuel Mwaura said there are multiple cases of laxities in tax collection that has seen KRA lose opportunities to net more revenue.

“Kenyans want to pay tax but the approach KRA uses to collect the taxes has been of a misdirected energy. The same companies are audited every year and sometimes two KRA offices ask to audit the same company,” Mr Mwaura said.

“There are reforms we see from outside but there are many more to be carried out from inside even in supporting taxpayers to meet their obligations. The collections can be far much more if KRA ups its game.”

KRA blames the latest revenue shortfall on delayed roll-out of Excise Duty Act 2015 through which the government sought to raise an additional Sh30 billion. The new tax law was effected in December.

Partial implementation through the use of Excise Goods Management System (EGMS) has, however, led to a big miss of revenues. In the first phase, where  wines and spirits as well as tobacco were marked with stickers to enable the taxman accurately collect revenue from these products and curb illicit items which do not pay tax from circulation, huge revenues were realised.

However, the second phase which would involve the use of secured coding and stamps on beer as well a few other soft drinks has failed to kick off thrice since January.

The deadline for beer manufacturers had earlier been set for January 1, 2016 but industry players pleaded for more time to clear stocks citing poor sales in December. KRA extended the deadline to March 30 and then to June 30.

“Kenya Revenue Authority, pursuant to the provisions of the Excise Duty Act 2015, wish to notify manufacturers, importers, distributors, retailers of beer as well as the general public that the deadline for old stocks in the market for manufactured or imported beer without excise stamps/codes affixed on has been extended to 30th June 2016,” read the notice placed in the mainstream media.

After the June 30, 2016 deadline, distributors and retailers were required to declare and handover all beer products bearing no stamps/codes to the respective manufacturers or importers who would fix them.

Fake stamps

The June deadline passed quietly. Smart Company wrote to KRA seeking to know what became of the plan, but there was  no response. The commissioner in charge of domestic tax was reportedly unwilling to reply in unclear circumstances.

The response was also expected to address reports that 391 bags of fake excise stamps had been nabbed in Kayole, Nairobi about a month ago. If used in a litre bottles of spirits, KRA would have lost Sh8.2 billion in revenue.

Use of fake stamps is rampant in markets where consumers are reluctant to send verification text messages whenever they order drinks. The peddlers of fake drinks then have a field day evading tax and impacting negatively on the income of tax-paying brewers.

KRA admits on its website that EGMS is a huge cash cow. According to the taxman, the roll out of   EGMS in 2013 saw tobacco revenue grow by Sh1 billion monthly by January 2015.

“In relation to spirit, the excise tax initially grew by 40 per cent leading to an additional collection of Sh1 billion in the first year (2013- 2014).

Subsequently, total collection has risen from Sh300 million per month to Sh600 million per month in 2014/2015. It is projected that monthly collections will rise to Sh800 million per month by 2016/2017,” KRA wrote on its site.

Why the measure that is meant to curb the use of counterfeits which bleeds Kenya in excess of Sh70 billion annually and that which denies the tax man more than Sh30 billion annually, apart from causing death of tax payers, lies in limbo remains vague.

In May 2016, KRA released a list of 124 cars with questionable importation details. They were among thousands of vehicles smuggled into the country without paying duty. A registration lapse had given cartels freedom to import mostly high-end vehicles and evade tax.

One of the vehicles belonging to a prominent politician had evaded Sh6.5 million in charges. The Range Rover was registered as an Isuzu truck.

KRA later told Smart Company that the owners and details of the vehicles had been identified. Four months later, only 12 vehicles have been presented for audit and the rest remain at large.

Recently the media revealed two cars sharing a number plate at a Nairobi Police station (an obvious sign of evaded tax). But apparently KRA never gave the issue the seriousness it deserves. The smuggled vehicles alone could have earned KRA over Sh1 billion.

A senior tax expert based in Nairobi blamed the taxman’s complacency on corruption among the officials who he said are heavily compromised to turn a blind eye on gaping revenue loopholes.

“It is corruption that is hurting KRA. How can you explain that these goods still slip through them at the port with all the pre-verification measures and scanners upgrade done?

Show me one poor KRA customs official and we can bet over it. I wonder what happened to the lifestyle audit that was ordered last year. As long as no one is being pursued, these targets will never be met,” the expert said adding that no one can precisely ascertain how much KRA collects.

KRA’s staff lifestyle audit was targeted at 70 top managers  but left out junior officers who are said to be driving the heavy revenue haemorrhage in collusion with unscrupulous dealers at the ports of entry.

Between February and May alone, KRA acted upon 12 junior staff implicated in the tax evasion web bleeding billions of shillings in revenue. Eight of them, mostly from the customs department, were arraigned in court.

With the glaring leakages related to big payers, KRA’s Vision 2018 targets to raise the number of active taxpayers to 4 million. Currently, only 3 million out of the 8.1 million in the Personal Identification Number (PIN) database are active.

To get the numbers, the taxman is targeting the 700,000 registered   motorcycle operators. The tax agency is also keen on roping in commercial small scale farmers whose income puts them in the taxpaying bracket.

Mobile platforms

“These exceed 1 million including 560,000 tea farmers, 150,000 coffee farmers, 250,000 sugarcane farmers and dairy farmers. Others include SME business who transact through mobile platforms, use agency banking, to register for electricity or water connections or pay for services whose payments are automated. There are over 2.7 million SME businesses in the country, virtually all are not registered for tax purposes,” read the vision.

Also on the radar are individual landlords who are currently not filing tax returns despite earning rental income that is within the tax bracket. Currently, only 15,000 individual landlords file tax returns annually against the estimated 100,000 who are eligible.

The informal sector including landlords in various estates in Nairobi raking in millions without paying tax remain at large.

The largely cash bases public transport in Kenya also deny the tax man revenues while the lowest paid employee have their dues chopped at the source to support the skewed revenue collection whose use in many cases are questionable.