This archive report was first published on 21 August 2019.
The Kenya Revenue Authority (KRA) is facing a significant challenge in meeting its tax mobilization goal as the country's economic structure undergoes a seismic shift due to the loss of jobs to automation.
According to data from the Kenya National Bureau of Statistics (KNBS), agriculture has emerged as the highest yielding industry, contributing 34.2 percent to the country's GDP in 2018, up from 27.5 percent in 2014.
On the other hand, the manufacturing sector has seen its share of GDP decline to 7.7 percent from 10 percent over the same period, while the finance and ICT sectors have plateaued at 6.5 and 1.3 percent respectively.
As a result, the growth in KRA revenues from the Pay As You Earn (PAYE) segment has slowed down to 7.9 percent in 2018, due to falling new employee registrations and widening tax bands.
“Sectors where we traditionally get a lot of revenues are showing weaknesses while on the vice versa, lesser yielding segments have become dominant,” said KRA’s Deputy Commissioner for Innovation and Risk Management Joseline Ogai.
With the decline in income-tax pegged revenues for KRA, the tax man has refocused its outlook to the traction of new tax policies and heightened compliance to existing taxes.
However, the switch in tact, including the incorporation of the now scrapped presumptive tax on small and medium enterprises (SMEs), has come under critique for disrupting economic activity.
“The primary reason of netting small tax payers would be to enhance compliance while the entities are still young, avoiding future compliance problems upon maturity of entities,” added Mr. Ogai.
As KRA struggles to meet its revenue collection target, the government has stepped up its course for greater domestic revenue mobilization, requiring KRA to raise Ksh.1.88 trillion in the current 2019/20 financial year.
New tax measures, including the near tripling of capital-gains tax, and increased excise taxes on betting, whisky, and cigarettes, are expected to prop up KRA’s tax base by at least a further Ksh.37 billion.
However, some of the measures, including the taxation of online business, remain the subject of solid regulations to streamline implementation.
“One of the key challenges is that transactions are not visible. That would call for the amendment of the definition of permanent establishments has businesses now do not necessary have physical offices or locations inside their countries of operation,” said KRA Tax Advisory Deputy Commissioner Caxton Masudi.
As the government pushes for greater domestic revenue mobilization, KRA is under pressure to meet its revenue targets, which is crucial in bringing down the budget funding deficit to at most 3 percent in the medium term.
