Piece by: VICTOR AMADALA & MOSES ODHIAMBO

20 January 2023

• In order to achieve this, the government will undertake a combination of both tax administrative and tax policy reforms, the National Treasury said in the policy statement issued Wednesday.

• In the ambitious plan, KRA seeks to reduce the Value Added Tax (VAT) gap from 38.9 per cent to 19.8 per cent.

President William Ruto's government is planning to integrate the Kenya Revenue Authority's tax system with M-Pesa and other online payments as it targets Sh3 trillion next financial year.

In a detailed Draft 2023 Budget Policy Statement titled 'Economic recovery agenda to promote inclusive growth', the Kenya Kwanza government has outlined an aggressive tax collection plan, which is expected to net Sh2.8 trillion.

In order to achieve this, the government will undertake a combination of both tax administrative and tax policy reforms, the National Treasury said in the policy statement issued Wednesday.

In the ambitious plan, KRA seeks to reduce the Value Added Tax (VAT) gap from 38.9 per cent to 19.8 per cent of the potential by fully rolling out the electronic Tax Invoice Management System (eTIMS).

Ruto's government is planning to reduce the Corporate Income Tax (CIT) gap from 32.2 per cent to 30 per cent and integrate the KRA tax system with the telecommunication companies.

It is also planning a tax base expansion in the informal sector and implementation of rental income tax measures by mapping rental properties.

Ruto's team further seeks to go big on technology at the customs and border control to enhance revenue per unit.

Other strategies are upscaling of the technical capacity of KRA through skills, technology and additional staffing.

And in signs that the measures may pay off, next year’s budget is projected to be bigger by about Sh250 billion while the budget deficit is tipped to shrink.

Next year’s deficit is projected at Sh695.2 billion — about 4.3 per cent of GDP, about Sh150 billion lower compared with this year’s balance of Sh849 billion.

The total expenditure is projected at Sh3.6 trillion, comprising Sh2.4 trillion for recurrent expenses and Sh796.4 billion for development.

This year’s expenditure was projected at about Sh3.4 trillion.

The development budget is also projected to increase by about Sh200 billion considering the Sh596 billion allocated by the previous administration.

To meet the goals, Ruto has asked the now Anthony Mwaura-led taxman for results, to net Sh1 trillion more this year.

It will be the first time the revenue agency will be riding on the Data Protection Act passed last year to extend its tax net to trap Kenyans who evade tax through mobile and online payments.

This will help it compare figures in tax returns with transactions on mobile wallets, hence easily flagging differences in remittances on M-Pesa, PayPal, and PesaLink and returns for tax evasion.

To support the economic recovery agenda, Ruto is planning to continue with the fiscal consolidation plan by containing expenditures and enhancing mobilisation of revenues to slow down growth in public debt without compromising service delivery.

This is expected to boost the country’s debt sustainability position and ensure that Kenya’s development agenda honours the principle of inter-generation equity.

In the FY 2023-24, revenue collection including Appropriation-in-Aid (A.i.A) is projected to increase to Sh2.9 trillion (17.8 per cent of GDP) up from the projected Sh2.5 trillion (17.3 per cent of GDP) in the current financial year.

"Revenue performance will be underpinned by the ongoing reforms in tax policy and revenue administration measures geared towards expanding the tax base," the exchequer said in the plan.

Ordinary revenues will amount to Sh2.6 trillion (15.8 per cent of GDP) in FY 2023-24 from the estimated Sh.2.2 trillion (15.1 per cent of GDP).

While the government expenditure as a share of GDP for FY 2023-24 is projected to decline to 22.4 per cent, the overall nominal expenditure and net lending is projected to increase to Sh3.64 trillion from Sh3.4 trillion this year.

From the amount, the executive is expecting to spend Sh2.13 trillion, Parliament Sh39.88 billion, Judiciary Sh20.7 billion, consolidated fund Sh908.8 billion and Sh375 billion for counties.

The Ministry of Education will receive the highest share of the budget at Sh580.5 billion, followed by Energy at Sh398.3 billion and international relations at Sh371.4 billion.

Others are governance at Sh234.7 billion, National Security Sh220.7 billion, health Sh148.3 billion and agriculture at Sh67.7 billion.

Reflecting the projected expenditures and revenues, the fiscal deficit (including grants), is projected at Sh695.2 billion (4.3 per cent of GDP) in FY 2023-24 against the estimated overall fiscal balance of Sh849.2 billion (5.8 per cent) this financial year.

The fiscal deficit in the financial year under review will be financed by net external financing of Sh198.6 billion (1.2 per cent of GDP) and net domestic borrowing of Sh496.6 billion.

Members of the public and experts are divided on the planned tax measures by Kenya Kwanza government, with those opposing the plan terming it subjective while those in support hailing it as a sure way to limit borrowing.

Jared Mwania, a taxi operator along Harambee Avenue in Nairobi is not comfortable government monitoring his expenditure.

"This is a violation to my right to privacy. The government must come up with a more friendly way to get taxes from the informal sector without scaring the target audience. How about it snoops on its own expenditure to avert rampant corruption," Mwania said.

His sentiment is shared by boda boda operators near Nyayo House in Nairobi who are wondering why the government cannot work on giving the informal sector feasible incentives so that players can voluntarily pay taxes.

Judith Atieno, a public servant and mother of three, is worried that even if the government collects those taxes, most of it will be looted.

"This will be nothing new under the sun. We pay taxes every day but do we really see results? The government must ease the tax burden to reduce inflation pressure," Atieno said.

Even so, the Parliamentary Budget Office (PBO), in its analysis of the Ruto economics, concluded that the tax revenue collection is still below the desired target.

The team also pointed out that tax policies adopted by KRA aimed at expanding the tax base, enhancing compliance and reducing tax expenditures must be enhanced.

“Without concrete policies that result in either the expansion of revenue as a share of gross domestic product or contraction of recurrent expenditure over the medium term, the fiscal deficit will remain high,” the experts said.

PBO further stated that the economy faces an uncertain future posed by poor rainfall, a weakening shilling, increased fuel prices, high debt servicing costs and declining levels of income.

“Therefore, the objective of reducing the fiscal deficit as a share of GDP to 4.1 per cent by the financial year 2024-25 may not be realised,” PBO said

Speaking about the integration of the KRA tax office and mobile money payment platforms at a past forum, KRA deputy commissioner Joseline Ogai says it is necessary to pursue incomes from mobile and online platforms due to a growing digital economy in Kenya.

“We are taking data matching very seriously as our next frontier in digital revenue monitoring. Soon, we will be able to catch tax cheats who make nil or few entries in their tax filings, yet the money they generate online is high,” Ogai said.