Taxman squeezes every penny to meet debt repayment target
Kenyans have become the biggest guarantors to the Government whenever it goes out to seek loans.
And any lender will lend the country cash if it promises it can continue taxing citizens.
Tax receipts are the inexhaustible resource that countries have to give lenders an idea of the stability of your income inflow.
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The assurance is so important that Kenya has put it in the Constitution that debt will be the first charge on revenues under the consolidated fund’s services only ranking next to savings for the elderly and salaries of the president and other constitutional office holders.
A close look at how Treasury borrows cash shows a curious relation between repaying debt and tax targets.
And Treasury seems to set a marker for the Kenya Revenue Authority (KRA) depending on how much debt servicing is done.
“Government seems to first calculate how much will be spent, then work backwards to drum up a revenue number of dubious collectability to make sure it fits some outside need, rating agency, IMF constraints etc, and then gets shocked when the target isn’t hit,” an analyst who did not wish to be quoted said.
And for the State to quench its huge appetite for ambitious projects, it has hatched an elaborate mechanism including increasing taxes that has hurt more Kenyans and aggressively following up suspected defaulters including taking them to court as well as taking over premises until they pay. Some even seek out of court settlement.
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The taxman has however failed to meet the target despite its aggressive pursuit of defaulters despite major lenders wanting to see Kenyans’ ability to fund such projects through increased taxation.
Ideally, the tax target should be based on productivity in the economy. It should be projected on the actual collected revenues but Treasury’s correlation has been disjointed since 2014 with tax targets set way above actuals.
But this is wishful thinking as the taxman has been having difficulties in taxing the overstated Gross Domestic product (GDP) number of an economy that is not being felt by Wanjiku.
The World Bank in its 16th edition of Kenya Economic Update noted that even though more goods and services have been traded, very little of these economic activities have been taxed even with KRA enhancing compliance.
“Although it (revenues) grew by 13.3 per cent in nominal terms in 2016/17 (financial year), tax revenues expanded by less than nominal GDP 14.9 per cent, hence the tax-to-GDP ratio fell to 16.9 per cent of GDP—its lowest level in a decade,” said the World Bank.
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So Treasury, which is facing the impossible task of paying mounting debt, has gone to KRA demanding the taxman squeezes every penny from anything that moves.
“Consistently failing to meet revenue targets sooner or later signals to the market and rating agencies that there is a flawed collection system or flawed target setting. Treasury needs to tighten this control if our mountainous debt is going to remain being rolled over and refinanced at an attractive rating,” Deepak Dave of Riverside Capital said.
The first point of call has always been the estimated four million people paying income taxes to boost the Sh180.3 billion Pay As You Earn (PAYE) collected last year.
KRA has increased data capabilities that link PAYE details to employers data that one has only to fill in pensions and personal relief. The data has however been able to trawl for any side hustle and automatically bill those filling returns with a demand for extra tax.
Under the income tax, KRA is also hoping to squeeze those who are late in filing taxes. Taxpayers who will miss the June 30 deadline for filing returns face a penalty of Sh2,000 for individuals and Sh10,000 or five per cent of the tax due for other entities under the Tax Procedure Act, 2015.
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The taxman has also promised to go after small scale traders under a newly introduced tax under the proposed Income Tax Bill, 2018.
Known as presumptive tax, it requires businesses issued with a single permit and with a turnover of less than Sh5 million be taxed at 15 per cent rate of the single business permit fee issued by a county government.
Institute of Certified Public Accountants of Kenya (ICPAK) Chairman Julius Mwatu said this was just the beginning for this ‘elusive class’ of taxpayers and once KRA has collected the data of the small scale ‘hustlers’ they may be subjected to more or higher taxes one year down the road.
Mr Mwatu said the KRA has now been able to recruit more taxpayers and might consider other ways to increase revenues from this elusive club to capture the class of taxpayers.
“Revenues can grow if KRA can focus more on the informal sector where it has in the past failed to tap into adequately. The presumptive tax has a big potential. I expect there will be a lot of recruitment this year and maybe next year, KRA may change tact. Now that they have recruited the informal players, it will possibly start asking more in addition to the presumptive tax,” he said.
“I would also propose the Government to look at the turn over tax. It is a good idea but failed to work because we removed the people that it would work on — these are landlords, professionals and small companies. It will also save the small business the hustle of putting together their books for KRA as the taxman would just collect tax on sales.”
Treasury Cabinet Secretary Henry Rotich also imposed an eight per cent Value Added Tax on petroleum products (which initially stood at 16 per cent but reduced after public outcry). Higher taxes on fuel means the Government is literally going for every sector of the economy from transport, electricity and local manufacturing to pay more taxes.
KRA Commissioner General John Njiraini also imposed a digital system, referred to as VAT Auto Assessment which was installed to compare VAT filling and receipts issued by the buyer and the seller.
The system has however come under criticism on its time limits and a buyer risks being punished for VAT inconsistencies on the side of the seller.
KRA will also start using the Electronic Tax Register automated solution on business to consumer transactions which will catch ETR data in real time and trace those that are inactive.
The taxman has recruited the Central Bank of Kenya to help it map the wealth of individuals and companies that lend to the government. CBK notified all buyers of Treasury debt papers to submit their PIN and contact details afresh for forwarding to the taxman in a renewed effort to expand the tax net.
“The Central Bank of Kenya is in the process of updating investors’ CDS accounts details in order to enhance service delivery and to comply with KRA i-Tax requirements,” CBK wrote.
While at it, KRA also wants to aggressively come after employees’ benefits and the net result is that you will pay taxes on meals, airtime, cars and house allowances that you receive from your employer.
Treasury has also altered the excise duty rate, pushing up the prices of beer, bottled water, cigarettes and fruit juices in what is seen as efforts to keep up with the rise in the price of goods and services or inflation.
Keyboard warriors have been targeted via telephone calls, data, and mobile money transfer taxes and Treasury doubled the excise duty on bank fees and money transfer from 10 per cent to 20 per cent.
Treasury also increased excise duty to 15 per cent on mobile phone services and introduced a 15 per cent excise duty on telephone and internet data services.
To increase surveillance, KRA has secured 10 baggage scanners scattered countrywide with some at the JKIA terminal 1E, tracking cargo trailers in real time. The taxman has also stripped containers to literally scan and inspect each consignment at Nairobi Inland Container Depot despite protests from Kenya International Freight and Warehousing Association (Kifwa).
“Importers have started incurring losses as some have shipments incurring storage charges of up to Sh25,000 a day,” Kifwa said.
National Assembly’s Budget and Appropriations Committee last week noted that among the areas that Treasury will have to work on including the tax holidays gifted mostly to foreign firms operating in Kenya.
“Reduce (tax) exemptions, increase effort to raise revenues as per targets and expedite court cases especially in withholding tax on betting and gaming. This will unlock additional revenue that will be utilised to reduce the deficit,” said the Committee in its report on the Budget Policy Statement.
Kenyans cannot wait for the next Finance Bill as Treasury continues to scratch its head for more avenues to tax you in their bid to ‘milk a stone’.
The taxman’s legal team has also been busy suing left, right and centre and even settling out of court if the taxpayers are willing to pay. Analysts say this will help KRA capture additional cash while acting as a deterrent but cannot be relied upon as a revenue stream.
“The move by the KRA is positive in the sense that litigation and settlement result in additional revenue collection as well as deterring potential tax evasion,” Renaldo D’souza, research analyst at Sterling Capital said. “Litigation and settlement is not always a straightforward process and is subject to delays. This should also be used as a measure of deterring future tax evasion rather than as a source of revenue,” he said.
Cigarette maker Mastermind Tobacco, which is reportedly an acquisition target of Phillip Morrison, is said to have agreed to settle a Sh2.9 billion tax bill.
KRA and Mastermind Tobacco filed a consent in court where the cigarette maker has offered to dispose of 12 properties in a bid to raise Sh1.54 billion and settle the balance in instalments.
The taxman has also shown zeal against figures previously assumed to be untouchable after they went after billionaire Humphrey Kariuki’s Thika based Africa Spirits Ltd. During the operations that commenced on the night of January 31, an estimated 21 million counterfeit excise stamps and 312,000 litres of illicit products valued at shillings 1.2 billion in estimated tax were seized.
KRA has also taken up the lawyers’ representative on the Judicial Service Commission (JSC) Tom Ojienda over Sh443.6 million tax arrears — even denying the lawyer a tax compliance certificate over the claim.
Several cases have also been filed by the taxman including KRA fight against Daniel Kaburi on January 11 who was arraigned in court for presenting a forged cheque for payment of customs duty amounting to Sh450,878.
Mr Kaburi denied the charge and was released on Sh500,000 bond with a surety of a similar amount or a Sh300,000 cash bail.
In January, KRA accused Dickson Ogola in court, for evading taxes amounting to more than Sh97 million.
Mr Ogola, a clearing and forwarding agent who was arraigned before Milimani Principal Magistrate Kennedy Cheruiyot, faces 12 counts of tax evasion. On the first count, he was charged with fraudulent evasion of duty payment amounting to Sh60 million. Mr Ogola is further facing another 11 counts of making 63 false customs declarations that led to the loss of tax revenue to the tune of Sh36 million.
Investigations by KRA had revealed that Ogola had been contracted by the Seventh Day Adventist (SDA) Church of Kenya to clear an assortment of items on behalf of the Church.
The investigations further indicated that the accused, who owns a non-licensed clearing and forwarding company, has been using various clearing and forwarding firms to clear the goods on behalf of the church.
KRA also charged the Managing Director of Oxygen8 East Africa Company Ltd on three counts of defaulting on obligations amounting to Sh523 million.
While there is increased vigour by KRA in pursuing tax evaders, questions abound as to whether these will have the impact of increasing tax revenues. Renaldo D’souza said KRA should focus on enforcing compliance and reducing the burden of tax on a few taxpayers by increasing the number of taxpayers. This would be a more sustainable way of ensuring that it surpasses its tax collection targets.
“Citizens feeling overburdened by a tax regime are likely to look for loopholes to evade or avoid paying taxes. Other than these tax measures, the government should focus on prudent expenditure,” he said.
He, however, said it is not strange for government revenue ambitions to be tied to its expected debt payments.
“Prudence suggests that they should be using expected debt service rather than actuals considering that they continue to borrow from both local and domestic sources and will need to have a better view of their debt service needs way before they fall due,” the Sterling Capital analyst said.
Mr Mwatu concurred that growing tax revenues is key if the country is to meet its obligations of paying recurrent and development expenditure while comfortably servicing debt.
“Ideally, the Government works like a credit card where you will first do the shopping then go look for the money. This is perfectly fine but what we need to ask ourselves is whether this is working for us. When we have a budget of Sh3 trillion and KRA is collecting Sh1.7 trillion, which is not even 70 per cent of the budget. It means we cannot even take care of our recurrent expenditure. It poses a challenge because for us to grow we have to borrow,” said Mwatu.
He, however, cautioned that it will increasingly be difficult to justify extra taxes if a large chunk of it is stolen through corrupt state officials.
“Borrowing is not entirely bad. The challenge we have is accountability because when the money comes, is it going to the right areas? We also have the challenge of the terms of our loans. Our average loans have a repayment period of about 17 years and so the amounts falling due for repayment are increasing every year and our revenues are not increasing at the same rates. This has the impact of changing the priorities and it is service delivery that suffers.”