Ideas & Debate

Let’s deploy new tactics to end revenue shortfall

tax burden
The tax burden should be spread evenly across by capturing those who are not already playing their civic duty of tax compliance. FILE PHOTO | NMG 

On November 5, scores of firms got national taxpayers honours for compliance in 2018/19. Although this is a tradition every year, coinciding with the national tax week, its significance is weighty.

It confirms there are entities diligently and selflessly carrying out their civic duty of remitting due tax to support the national economy. But even with such patriotism by these compliant firms, persistent national revenue collection shortfalls could be an indicator of the presence of some bad apples who are not playing their role in tax payment.

Picture this. Although government revenues grew 11 percent in the 2018/19(July-June) fiscal year, they still fell short of the targets set for the year. Data by the Kenya Revenue Authority (KRA) showed collections grew to Sh1.58 trillion during the year ended June 2019, up from Sh1.435 trillion in 2017/18.

The government had a projected revenue target of Sh1.643 billion shillings for 2018/19 and KRA has been asked to collect Sh1.938 trillion in 2019/20.

From these figures, is clear that the government believes that there is a large, untapped potential of revenue due to a tax collection gap which could be closed, and additional revenue collected, if everyone complied. Such a gap and corresponding level of non-compliance should be a major concern for us all especially at time when the economy is faced with adverse conditions.

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It is worthy to note that the National Treasury recently revised up its expected 2019/2020 fiscal deficit for the second time in a matter of weeks as the country tries to cut spending amid a struggle to raise revenue.

The Finance ministry indicates it would now target a deficit of 6.2 percent of Gross Domestic Product (GDP) for the current fiscal year, which runs from July to June, compared with a forecast of 5.9 percent issued in September. In its Sh2.8 trillion budget in June, the government had set a target to bring the deficit down from 7.7 per cent of GDP in 2018/19 to 5.6 per cent during the current fiscal year.

The impact of budget deficits can be grave to an economy in many ways. For instance, a country could be forced to cut spending on capital projects such as infrastructure, health and energy to deal with the shortfall in finances. Others may resort to costly borrowing or in worst cases even mint additional currency to cover payments on debts issuing securities, such as bonds and Treasury bills (T-Bills) which carries with it the risk of hyperinflation.

Faced with the tough economic times, the government projects overall 2019/20 expenditure of Sh2.84 trillion and Sh2.79 trillion in 2020/21. Consequently, state departments are expected “to adopt the culture of doing more with less” as part of the plan to help it lower the deficit to 5.3 per cent by 2020/21.

We have already some key players in the economy such as the Judiciary hit by budget cuts, effectively slowing down their operations.

This kind of situation is not sustainable, and it is only proper that the tax net is widened to capture more revenue that still lay out there. Those already in the tax net should not be overburdened into carrying the national weight alone. Those who have not yet been contributing their fair share should not decry attempts to bring them on board as ‘economy killing’ actions by our government – in fact, these firms have been taking an unfair (and, mind you, illegal) advantage to increase their margins through evasion.

The tax burden should be spread evenly across by capturing those who are not already playing their civic duty of tax compliance. Gladly, efforts by the KRA netted 1.11 million additional active taxpayers in the year ended June 2019, raising the country’s tax base to 5.05 million.

More can be achieved with deeper deployment of technology such as iTax, the online tax filing system, the Integrated Customs Management System (iCMS) for real-time monitoring of goods entering the country through the Mombasa port and airports, and the Electronic Cargo Tracking System (ECTS) for transit cargo could also help boost collection from a wider base.

Further, the government is capitalising on the expansion of the Excisable Goods Management System (EGMS) to net more revenue. EGMS tracks and ensures proper taxation of tobacco, wine, spirits and beer products and just recently started tracking soda, juices and bottled water as well. EGMS has the potential to close the tax collection gap in these new sectors, bringing significantly more revenue to the government while also providing consumers with a tool for verifying some of the products that they are purchasing and helping protect the market share of legitimate producers and importers from unfair competition posed by illicit trade.

Given the impact of EGMS so far in Kenya, and of similar systems in neighbouring Tanzania and Uganda, it might even make sense for the government to consider expanding the use of EMGS to domains beyond excisable products – the fight against counterfeit, illicit and substandard goods waged by the Anti-Counterfeit Agency (ACA), the Pharmacy and Poisons Board (PPB) and the Kenya Bureau of Standards (KEBS) comes immediately to mind. Gains in this fight not only benefit and protect consumers and legitimate businesses but also enhance government revenues.

The writer is chairman, Association of Professional Societies in East Africa.

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