Experts are drilling holes in the Treasury’s revenue plans
Friday 4th June 2021
The tax proposals contained in the Finance Act 2021 are not expected to bring any significant increases in revenue in the budget year from July 1, said a parliamentary think tank.
The Parliamentary Budget Office (PBO) – the unit that advises lawmakers on financial and budgetary issues – said the bill is leaving out all new proposals on income tax.
“Tax improvement measures such as strengthening the audit function in the domestic tax department, improved scanning, settling tax disputes through alternative dispute resolution and speeding up the settlement of cases before the tax appeals court do not address the structural problems that have contributed to the decline in revenue”, PBO said in a review of the Treasury Department’s 2021/22 budget and the 2021 Finance Act.
The Treasury Department has recommended changes to the bill to broaden the definition and scope of the digital services tax (DST), strengthen the Kenya Revenue Authority’s (KRA) role in debt collection, and impose excise taxes on items such as nicotine substitutes and jewelry.
“Also, the proposals … are unlikely to result in a significant increase in revenue as a percentage of gross domestic product (GDP),” PBO said.
The analysts said the Treasury Department’s reforms failed to address the primary course of dwindling tax heads such as income tax and sales tax levies, which can be attributed to a collapse in informal employment and multiple tax exemptions.
PBO said the Treasury Department consistently set unrealistic revenue targets during the budgeting process.
“On average, actual income tax receipts between 2015/16 and 2018/19 were 13 percent below the target set in the printed estimates. Likewise, the actual tax collection from value added tax, import duties and consumption taxes was on average around seven percent below the set target, ”said the analysts at PBO.
The office said falling income tax and VAT collection were the main reasons behind the decline in tax revenues as a percentage of GDP.
“The below-average development of revenue in relation to economic growth was one of the main reasons for the growing budget deficit,” said the PBO.
Financial experts are calling for the Treasury Department to abandon the usual revenue-boosting measures that have proven ineffective in boosting revenue in recent years.
The national treasury projects total revenue collection of Sh2.039 trillion (16.4 percent of GDP) in 2021/22, of which ordinary revenue will be Sh1.776 trillion (14.3 percent of GDP).
The targeted collection from the income tax, which accounts for about 50 percent of the tax revenue, is 835 billion Shillings.
According to Treasury Department documents, the other main sources of ordinary income will be Sh473 billion from sales tax, Sh241 billion from excise tax, and Sh119 billion from import duties.