Treasury’s Headache Over Sh1.6 Trillion Budget

Times Tower, headquarters of Kenya Revenue Authority.

BY CONSTANT MUNDA
TUESDAY, 7 MAY, 2013

After beating the April 30 constitutional deadline to submit budgetary estimates for 2013/14 financial year to the National Assembly, Treasury’s headache is now how to finance the Sh1.6 trillion budget. Raising money through ordinary revenue streams – income tax, value added tax (VAT), excise and custom duties - is proving a critical focus for the Treasury.

Trends show the country has been over-optimistic in revenue projections despite as it banks more on internally-generated funds (taxes), which now finance almost 90 percent of the budget. During the unveiling of the 2012/13Budget on June 15, last year, the target was quoted at Sh870.5 billion, upgraded to Sh1 trillion on October 22, slashed back to Sh881.2 billion on January 4 and trimmed further to Sh839.3 billion. But even with the revisions, KRA had collected Sh560.4 billion for the nine-month period to March 31.

To beat the target, the agency must collect Sh279 million by the end of the financial year - June 30. Kenya Revenue Authority (KRA) Commissioner General John Njiraini has blamed a lull economy, especially during electioneering period with “below expectations” macro-economic parameters biting off Sh26.9 billion from revenue cake. By his own admission and that of tax experts, the economy has capacity to generate up to Sh1 trillion in tax revenue if compliance is fully enforced.

According to Director of Tax Services at PKF East Africa, Michael Mburugu, KRA needs to urgently overhaul its tax collection strategies. The tax collector should further devolve collection of taxation levies by establishing structures in all 47 county governments, he added. “There is need for a radical surgery of this institution to create efficiency,” Mburugu told the Business Hub. That the country loses a significant amount of taxable revenue through system leakages is not in dispute. “It is not possible to quantify the loss but it’s significant,” the PKF tax advisor said.

The KRA is awake to most avenues through which it loses billions of shillings. Most of ongoing tax collection systems’ upgrade and refreshing of policy framework are almost complete and will be switched on in the course of next financial year. The agency believes sealing loopholes could deliver Sh1 trillion revenue in next financial year. Njiraini has admitted past institutional and policy weaknesses have been responsible for noncompliance in tax remission.

To start with, KRA is developing a central system at Times Towers to be linked to all Electronic Tax Registers (ETRs) at points of sale in a bid to stem growing fraudulent VAT invoice claims. “We don’t know to what extend the fraud has been going on but we detected it through a case early this year and we hope to arrest such fraudulent claims through the new (ETR) system,” said Njiraini.

KRA is also working on clamping down tax evasion at customs offices at the Port of Mombasa. This is where importers declare goods as transit but end up in domestic market or declare them as zero-rated goods. Another case was on February 14 when KRA unearthed a motor vehicle registration scandal involving its own staff with internal preliminary investigations revealing at least 1,000 logbooks were irregularly and illegally issued.

“Late last year, for instance, a container classified as household goods on transit, was found to contain top of the range BMW cars,” Njiraini said. The tax collector is currently relying on information sharing mechanism with top destination countries for transit goods - landlocked Uganda, Burundi and Rwanda. This measure is being deployed as it awaits impending High Court determination on suspended Electronic Cargo Tracking System whose implementation was challenged in October 2010 by Kenya Transport Association.

The system tracks interior movement of cargo from the Port. Besides system upgrades, the tax agency is also crafting a series of policy reviews. A draft policy framework on alternative dispute resolution mechanism has been developed and is due for stakeholder consultations. At least Sh200 billion in assessed tax revenue is locked up in court cases filed five to 10 years ago due to lengthy processes.

“The Constitution emphasises the need to deal with disputes outside formal court system because it’s expensive,” Njiraini said on November 21 last. “It’s frustrating for us.” KRA is also seeking a policy shift to have a uniform levy on all brands of beer and cigarettes to boost its domestic excise duty stream supported almost 90 per cent by these two commodities.

“From taxation point of view, taxing similar products differently is a risky proposition. They should be taxed uniformly and let consumers choose based on quality and not preferential taxation treatment,” he said. But above all, KRA is rooting for re-introduction of universal filling of income returns that will see all income earners file returns.

The system, Njiraini said, will help stem tax leaks from employers who don’t remit deductions from their employees. It will further go a long way in roping tax-elusive landlords, some of whom have not cooperated despite the income tax law being in place since 1973. Jamleck Guchuhi, an auditor partner and proprietor of Jam Martins Gachuhi & Co Certified Public Accountants in Nairobi said tax impunity in real estate is a mirror of how the rich have left the middle class to bear most of the tax burden on their head.

Indeed, over the years, the tax authority has not shown serious intent on compelling the landlords and developers to pay taxes until in 2010 when it developed tax guidelines to make them compliant. For the nine-period to last March, the revenue body earned Sh453 million from the sector way below the billions that were earlier anticipated.

Over the same period, the KRA has lost Sh11 billion in VAT revenue due to failure to enact the controversial VAT Bill 2012 that was to eliminate most of tax exemptions and zeroratings that have proved ineffective. “A lot of work had been done although key issues were on taxing basic commodities including food,” Njiraini said of the proposed law that seeks to impose taxation based on consumption.

Getting its targets right will help dig it out of a string of arbitrary budget cuts late in the year when revenue and borrowing off-targets become clear. While tabling the revenue estimates, Treasury failed to enumerate revenue estimates as obligated under article 221 of the Constitution. The revenue estimates should also have contained donor funding and the deficit to be funded either through domestic or foreign borrowing or both.

Its failure may nevertheless be a carefully worked out strategy to come up with realistic revenue targets before making them public. A senior Treasury official, who was overly cagey and did not want to be quoted, said the delay has been occasioned by a restructuring of government to 18 from 42 ministries.