Budget Policy Statement 2019
Central Bank
Henry Rotich
Kenya Revenue Authority
Moody’s Investor Service
National Assembly
National Treasury
New York
Railway Development Levy and Road Maintenance Levy

Focus on taxman after revenue shortfalls hit Sh185bn in three years

Missed targets Kenya Revenue Authority’s strategies on the spot and leave Treasury with budgeting deficits.

Kenya’s cumulative revenue collection shortfall hit Sh185 billion in the three years to June 2018, throwing the National Treasury into a fix and shinning the spotlight on the taxman’s strategies. Treasury secretary Henry Rotich had set a target of nearly Sh4.19 trillion for the Kenya Revenue Authority (KRA) in the period, but that fell short by Sh184.8 billion largely due to shocks in the economy and inefficiencies in the tax administration system.Collections in taxes and levies — Railway Development Levy and Road Maintenance Levy — missed the Sh1.213 trillion target for the year ended June 2016 by Sh12.4 billion.That shortfall, however, surged to Sh66.6 billion of the Sh1.43 trillion targeted in the financial year 2016-17 and worsened further to a whopping Sh106 billion last financial year ended June 2018, statistics by the KRA shows.The taxman said below-target expansion in economic activities, higher inflation — a measure of cost living — and a weaker shilling alone wiped out Sh69.8 billion in potential revenue in three years through June 2018.

The huge shortfall in revenue collection target last financial year ended June appeared to anger Mr Rotich amid piling pressure from State ministries, departments and agencies (MDAs) requesting for funds allocated in the budget.“We have given them (KRA) the mandate to collect revenues and they have to deliver,” said Mr Rotich on March 17, 2018, adding that the agency had been backed in hiring more staff and procurement of scanners to nab tax cheats.

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“I will personally be visiting collection points to ensure whoever is not working to deliver our targets will face the wrath of the Treasury.”The taxman has, however, partly blamed the shortfall in revenue targets on macroeconomic fundamentals, which underperformed projections which the Treasury had relied on.Kenya’s gross domestic product (GDP), a measure of national wealth, grew by 5.57 per cent on average in the three-year period through June 2018 against a target of 5.8 per cent, the KRA argue in a review of its sixth corporate plan for the period.Economic activity in the year to June 2016 expanded by 5.9 per cent against a target of 6.1 per cent, worsening to 5.5 per cent against a projection of 6.1 per cent in the following year and five per cent against 5.3 per cent forecast in the year ended June 2018.

Reduced expansion in the economy, analysts say, slows down the profitability of companies and creation of new job opportunities, hurting tax collections.Inflation, on the other hand, averaged 6.5 per cent against a target of 5.8 per cent in the review period while the shilling averaged 102.33 units against US dollar, weaker than a forecast of 94.5 units forecast.Higher inflation amid flat wages eats into income for households, hurting their purchasing power while a weaker shilling eats into foreign exchange earnings, including exports.The actual cumulative estimated impact of macroeconomic variance was Sh69.8 billion, accounting for 37.8 per cent of the shortfall,” the underperforming KRA says of the missed revenue targets.

“Variances in the inflation rates and real GDP growth rates led to foregone revenue of Sh49.329 billion and Sh13.860 billion, respectively,” said the agency, adding that this accounted for 37.8 per cent of the shortfall. A large chunk of the shortfall could as a result of administrative leaks.Shortfalls in revenue collection targets widen the country’s budget deficit which is bridged through increased borrowing to meet cash demands for public service delivery and development projects.The stock of total public debt over the three-year period jumped by nearly three-quarters, or Sh2.15 trillion, to stand at Sh5.04 trillion in June 2018 from Sh2.89 trillion in July 2015, Central Bank of Kenya’s statistics show.“The government will continue with fiscal consolidation efforts. Deliberate steps will be undertaken to narrow the budget deficit and stabilise public debt, prioritise development expenditures while protecting social spending and investments,” says Mr Rotich in the Budget Policy Statement 2019 presently before the National Assembly.The Treasury also plans to implement various measures to boost revenue mobilisation including an overhaul of the current Income Tax Act, strengthening tax administration and expansion of the tax base.This is aimed at cutting the country’s fiscal deficit from 7.2 per cent in the year ended June 2018 to targeted 6.3 per cent in the current year, 5.1 per cent in the year starting July 2019 and 3.9 per cent in the fiscal year 2020-21.“Improved revenue collection will be key to achieving the authorities’ deficit reduction target.“Government revenue declined to 17.6 per cent of GDP in fiscal (ended June) 2018, down from 18.9 per cent in fiscal 2017 and 19.7 per cent in fiscal 2014,” researchers at New York-headquartered Moody’s Investor Service said in a January 14 note on Kenya.The KRA has a target of nearly Sh6.11 trillion in core revenue — taxes, Railway Development Levy and Road Maintenance Levy — in three years to June 2021, comprising nearly Sh1.81 trillion in the current year, Sh2 trillion in 2019-20 which starts in July and Sh2.3 trillion in 2020-21.Mr Njiraini, whose two terms of three years each ended March 3, 2018, before reportedly being extended for a year, has said the Sh1.81 trillion target for the current year was not likely to be achieved.“The prolonged elections significantly affected businesses. We are largely getting out of it, but we are not out of it,” the chief taxman said on January 16.“We still have businesses complaining and expressing concerns regarding the (the slow) pickup of economic activities and sluggish demand, and, therefore, affecting bottom-line in terms of profitability.”The taxman targets to expand the tax base by 3.06 million taxpayers by June 2021 from 3.94 million in June 2018 by spying on homes and businesses using technology to flash out cheats in a bid to raise compliance to 65 per cent in June 2021 from 59 per cent in June 2018.This includes 418,000 new individual taxpayers, 10,500 corporate bodies, 1.56 million micro enterprises with Single business permits, 66,000 landlords and 25,000 professionals.The KRA said implementation of the strategy to achieve its revenue targets will cost taxpayers Sh103.69 billion, an average of Sh34.56 billion a year.“We may not always get all the funding that we require, but we have reached a level of understanding with the Treasury in terms of how we should prioritise allocation to the KRA and also look at ways by which KRA funding can be ring-fenced,” said Mr Njiraini.“We are at the beginning of the process, so if things don’t work here, then things don’t work for the country and it’s important that resourcing for us is properly handled.”

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