KRA faces pressure to adjust tax revenues to GDP growth
Pressure continues to pile on the taxman to ensure revenues increase in line with gross domestic product (GDP) growth with President William Ruto becoming the latest after Treasury and US-based bank JP Morgan to make that call.
The President said despite a significant rise in GDP in the last five years, Kenya Revenue Authority (KRA) is still underperforming in tax collection.
“Our GDP has risen to Sh12 trillion. KRA collected just 14 per cent of this. I expect KRA to raise Sh3 trillion by next year and to double that in the next five years,” Ruto said. The President said that KRA should at least collect 18 per cent of GDP this financial year.
Widespread value added tax (VAT) exemptions and erosion of corporate income tax due to incentives are some of the reasons the taxman is collecting less tax relative to the country’s, according to JP Morgan. The US-based bank says Kenya’s tax revenues to GDP have been declining since 2004 and continue to slide.
It says the responsiveness of tax revenue to nominal GDP has been minimal over the years despite a near doubling of GDP in the last six years.
“So, even if growth surprises to the upside (the IMF expects nominal GDP to increase by 4.4 per cent in 2022), the benefit to tax revenue would be limited given the low and falling tax buoyancy,” JP Morgan notes in a report.
According to the Budget Review and Outlook Paper published by the National Treasury, tax revenues as a share of GDP has been declining since 2013.
The revenues declined from 18.2 per cent in the financial year 2013/14 to 15.4 per cent in the financial year 2018/19, a decline mainly associated with various challenges including increase in tax incentives.
Also contributing to the revenue decline are growth of the informal sectors which are hard to tax and change in business models which have created tax administrative bottlenecks,” said Treasury.
International Monetary Fund (IMF) ascribes the declining trend to a growing number of discretionary personal income tax incentives and widespread VAT exemptions. It also attributes it to an erosion of the corporate income tax base resulting from tax depreciation and capital allowances as well as a reduction in the effective tax base due to decline in the role of the agricultural sector in the economy.
The softer tax measures introduced at the onset of the pandemic would have exacerbated this trend, although some of those tax adjustments have been reversed.
“If growth is to slow down in 2022, in keeping with the historical trend, this will naturally raise questions about the ability of the authorities to raise domestic tax revenue. This, of course, is vital at a time when Kenya does not have market access,” JPMorgan said in a research note,
KRA expects to beat its initial revenue collection target for the current fiscal year by up to Sh140 billion, driven by an improved collection of consumption and income taxes as the economy continues its post-Covid recovery.
Commissioner General Githii Mburu said his agency has exceeded two upward revenue target revisions brought in through supplementary budgets, pointing to the enhanced tax enforcement and recovery measures the taxman has been implementing in the period.