Last week we published an article requesting our readers to remind their landlords to pay the new residential rental income tax, a tax that was introduced following the Government’s policy to expand tax base in order to generate increased revenue amid increased expenditure. A number of our readers reacted to the article via our Twitter Timeline and Facebook Page with three main divergent views emerging. Let’s discuss these views to find out whether KRA is justified to aggressively pursue the newly introduce residential rental income tax.
One school of thought held that the Government has no business expanding tax base as this would mean over taxing the few who pay taxes; that the best approach would be for the Government to increase VAT so that every Kenyan can contribute equally to the tax coffers.
The second school of thought held that KRA is not even meeting current tax targets due to existence of tax loopholes that should be sealed. They contend that broadening the tax base without first working on an effective and efficient tax collection system will just expose the new residential rental income tax to the existing loopholes hence little will be gained. Further, they state that if the existing tax loopholes are sealed, then the country may not even require to expand her tax base in the near future.
Then finally we have the school of thought that support the introduction of the residential rental income tax, and this group reason that it is unfair for some income generating activities to go untaxed as this would overburden those already taxed. Even if loopholes exist, the extra revenue that KRA will generate from the new tax regime will go along way in funding significant portions of the national budget.
Given the three divergent thoughts concerning the introduction of residential rental income tax, I was left wondering whether KRA is justified to introduce the new tax bracket, or would it be better for the new tax bracket to be introduced at some future date. I think the best way to approach this question is to examine our budget against KRA revenue targets.
In the financial year 2015/2016, Cabinet Secretary Henry Rotich presented to parliament a budget of Kshs 2 trillion. KRA on the other hand had a target to collect Kshs 1.25 trillion to fund the same budget, creating a deficit of Kshs 750 billion. To fund this deficit, the Government was forced to borrow both from Domestic and International markets (see Kenya prepares for yet another Eurobond loan before properly accounting for the previous Eurobond). As the years progress, the national budget grows bigger due to increased population, increased wage bill, increased recurrent expenditure resulting from rising commodity prices, and the need to increase funding for infrastructural development. If the government is unable to raise more revenues to match expanding budget, then the only alternative is to borrow more as has been happening since 2010 – but borrowing also has an upper limit that the current loan portfolio is almost reaching.
The best option the government has to fund its budget is therefore to generate more revenues through taxation, but the Government cannot just decide to increase tax percentages on existing tax regimes as this will mean over taxing those already taxed. For example according to a PwC report of 2013, “on average companies in Kenya pay a total tax rate of 44.2 percent, slightly higher than the 43.1 percent of global average”.It therefore means increasing percentages on the existing tax regimes is not viable for businesses and individuals. If increasing percentages of existing tax regimes is not a good options, then the best alternative is to expand the tax bracket through systematic identification of the untaxed Kenyans.
In September last year, KRA launched its sixth corporate plan that among other things had the target of collecting Kshs 5.3 trillion in the financial years 2016/2017, 2017/2018 and 2018/2019. To meet this target, KRA explained that it will not increase tax percentages but rather bring into the tax bracket 4.4 million new taxpayers. As KRA has already started implementing its “next three years” tax targets, it is understable that they are aggressively pursuing the implementation of the new residential rental income tax regime.
Even though it is understandable that the government ought to expand the tax bracket, KRA should also be serious in sealing tax loopholes that allow millions of Kenyans to evade paying taxes. For instance, a commenter who held the opinion that the Government has no business widening the tax brackets before sealing existing tax loopholes mentioned that following a research work he has done on tax returns where he investigated Nairobi businesses, a number of businesses to not pay VAT as either they do not issue VAT receipts willingly, and when asked they issue the receipts from counterfeit VAT machines. He also mentioned that those evading paying the VAT are not afraid of legal recourse as they know how to sweetly talk to KRA.
Research done on tax evasion revealed that between 2001 and 2010, Kenya lost approximately shs 952 billion per year through tax evasion at a time Kenya’s annual revenue was way below shs 500 billion a year. If the loopholes that existed in those years that allowed that extensive tax evasion haven’t been sealed, then it means the country is still losing billions of shillings annually through tax evasion.
In principle therefore, it is necessary for KRA to also aggressively pursue sealing existing tax loopholes, even as it aggressively pursues implementing newly identified tax bases. However the argument that KRA should increase percentages on existing tax regimes especially VAT does not sound user friendly. The cost of living in Kenya against income is already too high for the common mwananchi. Also requiring low income earners to contribute tax at the same rate as high income earners is unjust and unfair. Increasing VAT will also discourage consumption and this in turn will decrease revenue KRA can collect from VAT.
In conclusion, I do believe KRA is completely justified to aggressively pursue the already identified new tax brackets like the residential income tax, and continue implementing its sixth corporate plan that targets to include 4.4 million additional taxpayers to the tax bracket. And with the same strength and aggressiveness, KRA must pursue sealing all existing tax loopholes so that we do not hear of the news that they are unable to meet their tax targets.