Sh200bn lost in tax waivers and evasion

(Business Daily Africa)-15th August 2007
Treasury's public finance reform unit says there is a high level of tax evasion and too many waivers that reduce government revenue.
Although a detailed study is yet to be done, tax experts have estimated that it is possible to collect Sh600 billion or 50 per cent more tax, than is currently the case. The 2006/7 collections were Sh376 billion, but Treasury expects to get Sh429 billion in the 2007/8 fiscal year, which is about 21 per cent of the gross domestic product.
Uganda collects about 23 per cent of its GDP, while a middle income countries such as Greece has been know to collect up to 45 per cent of its GDP.
It has also emerged that not enough efforts have been put towards ensuring that non-tax revenue is collected. The little collected is not even remitted to the Treasury and may be ending up lining individuals' pockets.
Although Finance minister Amos Kimunya thanked Kenyans for paying tax when he presented the Budget in June, concern has emerged over actual potential of revenue collection as Treasury embarks on reforms under the Public Financial Management (PFM) programme.
A paper on the constraints to better PFM says: "Diagnostic studies have revealed that there is a high level of tax evasion and waivers. In addition, the level of efforts to collect non-tax revenue is low and revenue collected is sometimes not remitted to Treasury, leading to excess and hidden expenditure."
An attempt by Business Daily to get a response from the Kenya Revenue Authority was unsuccessful. KRA is headed by Commissioner General Michael Waweru.
However, tax expert Paulino Mutegi of Ernst & Young says that even GDP figure must be lower than the actual production in Kenya, indicating that a much higher level of tax is possible.
"I cannot say for sure how much more can be collected, but the potential is great. Many people don't pay tax on income from buildings they own and the jua kali sector largely goes untaxed," Mr Mutegi said. He urged the government to have a friendly tax regime, adding that many people who are currently not paying tax would end up paying voluntarily.
He said many farming activities as well as those in the informal sector were not captured in the GDP. Total revenues, including appropriations-in-aid, are projected to increase by about 14 per cent, bringing the total tax collection to about Sh428.8billion.
The state believes that the improved performance is underpinned by on-going reforms in tax administration, while the streamlining of the exemptions regime in line with other East African Community partner states is also expected to protect the revenue base. But critics have pointed out that revenues can exceed Sh600 billion if tax administration as well as the capacity of KRA were improved.
Tax evasion problem In sub-Sahran Africa, revenue to GDP ratio is below 20 per cent, showing that Kenya is among the highest in the region.
However, in a country like Greece, the ration was 46.5 per cent in 2003. In Uganda, the ratio is about 22 to 23 per cent, yet the country has less than half the size of Kenya's economy. Thus it is possible for Kenya to get at least 30 per cent of GDP in revenue if stringent measures were to be effected.
The tax evasion problem is not unique to Kenya. The Tanzanian Revenue Authority is currently facing a daunting task because the revenue to GDP ratio, at below 15 per cent, remains significantly below the average for Sub-Saharan Africa.
The paper by PFM further shows that Kenya's financial management system suffers also because budget disbursements are unpredictable as payments can be delayed resulting in high arrears. "Cash management and commitment is still poor," says the report.
It notes that the variance between the annual budget and the final expenditure outcome is high. Mr Kimunya recently said the finances needed to be streamlined to ensure that resources allocated were actually spent rather than returned to Treasury as is the case from year to year.
"Parliament's, line ministries and district level involvement in the budget process is low and the process delayed. Budget allocations do not adequately address poverty alleviation," the report said.