Tax Evasion War, As Kenya Steps Up Revenue Mobilization Efforts
Kenya, just like most economies, is gradually overcoming the economic damages of the coronavirus pandemic despite a recent third wave of COVID-19 infections. The pandemic has derailed Kenya’s positive growth trajectory over the years causing growth to contract 0.1 percent in 2020 from 5.4 percent in 2019. However, IMF estimates show that growth will pick up strongly at 6.3 percent in 2021. The Fund also warns that uncertainty and pandemic-related pressures will persist until vaccinations become widely available. Average prices are expected to remain low, rising marginally from 5.3 percent in 2020 to 5.5 percent in 2021.
Dealing with pandemic-related risks put a strain on public finances especially when the government has not been able to mobilize the much-needed revenues to match up with its growing expenditures. According to the IMF, Kenya’s revenues, as a percentage of GDP, is expected to decline marginally from 17.2 percent in 2020 to 17.1 percent in 2021. Conversely, the Fund expects expenditures to rise to 25.7 percent in 2021 from 25 percent in 2020.
Already, Kenya’s debt situation has reached unsustainable levels as borrowing has pushed total debt to Sh7.4 trillion, representing 69 percent of the GDP, up from 48.6 percent in 2015. Meanwhile, Kenya plans to borrow an additional Sh929 billion in the next fiscal year. All these developments provide a justification for the stringent efforts by the Kenyan government to improve its revenue mobilization whilst reducing its debt burden.
Public Sector Workers Experience Freeze In Pay Increments
The Kenyan government has announced a freeze on salary increments for all civil servants for two years, beginning July 2021.The suspension announced by the Salaries and Remuneration Commission (SRC) affects basic salary, allowances and benefits paid in the public sector. As such, the freeze affects all government workers.
It has been a major challenge for the Treasury to raise revenues to finance the growing public wage bill which consumes more than 50 percent of tax revenues, impeding spending on development projects.
The National Treasury advised the commission that due to the effects of COVID-19 on the performance of revenue and the expected slow economic recovery, it should consider postponing the review for the next two fiscal years until the economy improves... The current public sector wage bill consumes a larger percentage of revenue than the target set in Public Finance Management Act, 2012 and a larger percentage of GDP compared to average for developing countries
”- Lyn Mengich, SRC Chairperson
The commission said the pay increment would have cost the government Sh82 billion. Meanwhile, the current wage bill stands at more than Sh800 billion, having risen from Sh458 billion in 2013. This has become a major concern for President Uhuru Kenyatta's administration since the current public wage bill is 17 percent above the global average of 35 percent for middle-income countries.
Plans To Deactivate Vat Account Of Defaultaers
Meanwhile, Kenya’s Revenue Authority (KRA) has threatened to deactivate about 100,000 accounts of Value Added Tax (VAT) defaulters as part of measures to clamp down on tax evasion.
The exercise will affect Personal Identification Numbers (PINs) of individuals and businesses with VAT obligations, but who perennially fail to file their monthly returns or persistently file nil returns. The KRA said the planned exercise will take place in the next two months, barely a few weeks after the taxman deactivated about 33,000 VAT accounts.
“We are talking about a number that is close to about 100,000. We are in the process of sieving the data so that we ensure that the people we deactivate are those who are not trading”, said KRA’s Taxpayer Services Manager, Wanja Wang’ondu in an interview with the Business Daily.
Parliament Dismistses Proposed 15% Rise In Motorbike Tax
Despite government’s desire to boost revenues, it is also very necessary to consider the short and medium term impacts of some of these policies on the welfare of citizens. This is because some Kenyans believe the government has been insensitive to their plights.
To provide a voice for the voiceless, Kenya’s Parliament has declined a request by the government to increase motorbike taxes by 15 percent from a current fixed charge of Sh11,608. The law making body rejected the proposal on grounds that it would negatively impact the ‘bodaboda’, a popular means of transport in Kenya. Had the tax been approved, motorcycles with values above Sh77, 386 would have attracted higher taxes, biting hard on the transport sector that relies heavily on the bikes.
“The proposal will increase the price of motorcycles and, therefore, negatively affect the bodaboda industry. In view of that the committee rejected the proposal in the Finance Bill 2021”, said the Finance Committee of Parliament.
Treasury Cabinet secretary, Ukur Yatani announced in this year’s budget statement new taxes on motorcycles effective July 1. According to him, the 15% rise in excise duty on motorcycles would help bridge the budget deficit in excess of Sh700 billion.
Most people in Kenya, especially the youth, have embraced the bodaboda business because it requires relatively cheaper start-up capital and fewer regulations. This business provides livelihoods for millions of families in Kenya, dominating the transport sector. For instance, an Economic Survey conducted in 2020 showed that bodabodas and tuk-tuk registration in the past year rose by 22,172 units despite recent economic challenges.
Gov’t Saved Sh5.2bn Due To Travel Restrictions
It was a good news for taxpayers when the Controller of Budget (CoB), Margaret Nyakango, announced that COVID-19 restrictions have helped save Sh5.21 billion which otherwise, would have been used to pay travel, training, and per diems for top State officials in Kenya.
According to a report from the CoB, top officials spent Sh13.85 billion on domestic and foreign travel, training, and per diems between March and December 2020. This was a 27 percentage fall from Sh19.06 billion spent in the corresponding period of the previous year.
Notably, spending on foreign trips recorded the biggest drop of Sh2.76 billion to Sh1.51 billion in the period under review. This was followed by the hospitality that dropped by Sh1.51 billion to Sh3 billion.
In March 2020, President Uhuru Kenyatta banned non-essential foreign travel by all State officials, directing the officials to obtain mandatory clearance to travel from the Head of Public Service. The President instructed ambassadors and high commissioners abroad to represent the government in engagements within their respective jurisdictions.
Kenya Could Exit List Of High-Risk Debt Countries
Kenya could possibly exit the World Bank Group’s list of countries with high risk of default on loans in 2028 if the government sticks to a program aimed at curtailing growth in government expenditure and growing taxes, the World Bank has said.
The multilateral lender expects the country’s debt risk profile to improve in the coming years on projected recovery in economic growth and exports. The Bank urged Kenya to utilize the fiscal consolidation program and also implement policy reforms to achieve this feat.
“Kenya’s public debt burden is projected to peak in FY2022/23 and then decline consistently, with the present value (PV) of public debt set to fall below the 55 percent high risk threshold by 2028”, the World Bank wrote in a report.
Kenya’s current status, High risk benchmark, means that the country’s debt carrying capacity is stretched, although is not currently facing any repayment difficulties. The country’s fiscal consolidation program is expected to help reduce the fiscal deficit from 8.7 percent of GDP to 7.5 percent this year.
Kenya Braces For Another GDP Rebasing
Kenya is preparing to rebase its economy after the issuance of its fourth Eurobond later this year. The last time Kenya went through a similar rebasing exercise dated back to 2014. The planned rebasing is expected to result in a higher GDP that will improve Kenya’s debt-to-GDP ratio. This will help Kenya obtain more loans with the justification that it has the capacity to carry a larger debt load.
In a preliminary offer document for the issuance of a Eurobond, the government said the rebasing will give an accurate reflection of the structure and size of the Kenyan economy. Kenya changed the base year from 2001 to 2009 when it rebased its economy in September 2014.
The rebasing saw Kenya’s GDP per capita grew from $994 to $1,256 and propelled the country to assume a middle-income status. In percentage terms, the last rebasing increased the size of the economy by 25.4 percent, putting the GDP figure for 2013 at Sh4.75 trillion, up from Sh3.8 trillion.
The rebasing in 2014 allowed the Government to account for changes in the production structure, relative to product prices and products. These measures have led to changes in the size of GDP, growth rates, contributions by sector, and related indicators that use GDP. The next rebasing is expected to take place later in 2021
”- The Treasury, (Eurobond document)
According to the latest National Economic Survey from the Bureau of Statistics, Kenya’s economy was valued at Sh9.7 trillion at End-December 2019. Should the rebasing come off as planned, it will be the seventh edition, after previous rebasing in 1957, 1967, 1976, 1985, 2005, and 2014.