The Treasury has announced that the tax exemptions it has given companies and individuals in past years will now be audited as the government moves to seal revenue leakages amid growing spending pressures and suspicions that some of the beneficiaries could have abused the system.
The audit plan comes in the wake of growing concern about possible abuse of the tax exemption scheme, which has dealt a blow to the government’s revenue collection drive.
Sources said some individuals and organisations have used single tax exemption approvals to make multiple irregular claims, thus denying the Exchequer revenue and resulting in unplanned revisions of government spending plans due to revenue shortfalls.
“Government continues to implement initiatives to boost revenue performance… The initiatives include… carrying out a comprehensive audit of all exemptions over the past five years to identify multiple use of a single exemption and make the relevant tax demands,” the Treasury said in new proposals ahead of the 2020/21 budget-making.
The disclosure comes only weeks after the Treasury wrote a memo to Cabinet Secretaries, governors and accounting officers at State departments and agencies, directing them to ensure that contractors in donor-funded projects pay relevant taxes after cases of noncompliance were noted.
“It has been established that the Ministries, Departments and State Agencies (MDAs), who are the withholding tax agents for the official aid-funded projects, have been facing challenges in withholding income tax on direct payments made by development partners to contractors or other persons engaged in the implementation of the projects,” Treasury Secretary Ukur Yatani said in the memo.
“In order to address these challenges and ensure compliance with the provisions of the Income Tax Act relating to withholding income tax on payments to the contractors or other persons engaged in the implementation of the projects… any request made shall be accompanied by a valid tax compliance certificate and a proof of payment of withholding income tax on the payment being requested,” he added.
The Kenya Revenue Authority (KRA) has in the past complained that it was facing challenges collecting taxes in cases where contractors in donor-funded projects were legally exempted, but then went ahead to use the same exemption certificates to purchase materials intended for commercial projects that were not part of the exemption agreement.
Last September, the taxman told Parliament that the cost of tax incentives that Treasury gives companies and individuals rose to a high of Sh478 billion in 2017 alone. In 2016, uncollected revenues, technically called tax expenditures, stood at Sh456 billion and Sh352 billion a year earlier.
John Kinuthia, a public finance analyst with Budget Partnership International, said that the main focus would likely be big companies that make huge purchases or imports because they could have significant exemptions that may also be abused from the point of view of the policy makers, but which could also be a result of lack of clarity on the part of the law.
“It is good to do the audit, but those who are going to be subjected to it need clarity and verification on the matter. Many areas of the law relating to this have a lot of room for different interpretations,” he said. “The cases of possible abuse of the exemptions are mostly found with big companies and we think that is where the audit is likely to focus. Again, that is where most revenue can be gained.”
A past review of the tax system in eastern Africa by a consortium of NGOs found that exemptions were doing more harm than good because they led to loss of revenues that were not offset by economic growth and job creation.
“Even as the authorities move to do an audit, they must consider the costs and benefits of the whole idea. The point should probably be more about doing away with the exemptions altogether since they only seem to benefit the big companies,” said Mr Kinuthia.
The Institute of Economic Affairs (IEA) has in the past also recommended a review of the whole exemption regime in Kenya because it often confuses taxpayers and does not always serve the intended purposes.
“Low performance in VAT and income tax affects overall domestic revenue mobilisation as they comprise about 70 percent of total tax revenue. It is therefore important that the government review the exemption regime of both VAT and corporate tax which are often obfuscate but also not always serving their intended purposes of equity and incentivising businesses,” said the IEA in an analytical paper.
The IEA noted that the proposed Income Tax Bill fundamentally shifts the traditional understanding of taxation by among other things, seeking to increase tax rates and remove exemptions. In the pre-budget proposals, the Treasury has also recommended to the KRA to ensure that resolution of cases involving non-payment of taxes is concluded quickly by moving them from court to Alternative Dispute Resolution (ADR) mechanisms. It further proposes that the other cases being handled by the Tax Appeals Tribunal be fast-tracked. The other initiative is to integrate government systems for third-party data matching – meaning data which comes from institutions such as commercial banks, professional associations and the power marketing firms – to enhance trade traceability and accountability for all imports going through Eldoret International Airport.
Further, the Treasury is also out to see integration of various scanners used by government agencies in order to reduce cases of mis-declaration and concealment while also allowing non-intrusive inspection.
It is also seeking to eliminate revenue administrative gaps and stopping revenue leakages, including leveraging information technology to improve collection efficiency by using the third-party data and ensuring compliance of registered professionals.
The Treasury has set KRA a target to collect Sh1.938 trillion in tax and other revenue in the current financial year, up from Sh1.58 trillion last year, from an initial Sh1.81 trillion earlier in that year.
The government is seeking to raise Sh242.2 billion in excise taxes in the 2019/2020 year compared to a target of Sh210.1 billion previously.