By Evans Ongwae
Most Kenyans believe that the government rarely meets its revenue collection targets mainly due to tax avoidance and evasion.
While tax evasion is any illegal step to avoid paying levies due to the government, such as not declaring income to revenue authorities; tax avoidance is the legal means of out-manoeuvring the tax regime by finding ways to pay the lowest rate of tax or none at all.
The abuse of existing tax loopholes through the combination of avoidance and evasion, makes Kenyans believe that this is one of the main reasons forcing the Government to borrow externally to bridge budget deficits.
A majority of the people surveyed across the country in June 2021 by the East African Tax and Governance Network (EATGN), said this was a key reason for why government does not achieve its tax collection targets.
About 31 percent of Kenyans perceive tax avoidance and evasion to be more problematic in achieving annual revenue targets than corruption or theft at 26 percent; poor economic growth at 20 percent; unrealistically high Kenya Revenue Authority (KRA) targets at 14 percent; and the burden from Kenya’s debt repayments at two percent.
Reacting to the findings of the study, titled, Revenue Collection and Economic Justice: Kenya National Tax Outlook Survey – 2021, Oxfam’s Riva Jalipa says people with means are exploiting legal loopholes to avoid paying their fair share of taxes. “They use accountants and lawyers to pay as little tax as possible, or none at all,” says the tax justice strategist.
On his part, the Executive Director of Tax Justice Network Africa (TJNA), Alvin Mosioma, says tax avoidance discourages other Kenyans from paying taxes. This is because it affects tax morale or people’s willingness to pay taxes voluntarily.
He says the general feeling is that paying taxes while other people in the same category do not do so or avoid them entirely by exploiting legal and accounting loopholes, is unfair.
More male than female respondents, at 32 and 30 percent, respectively, said some Kenyans avoided paying some or any taxes they were supposed to. Further, more people in urban settings, at 35 percent, view this as a major problem compared to 29 percent in rural settings.
In relation to age groups, youth’s aged between 18-35 years mentioned tax avoidance more, at 34 percent, compared to older respondents at 28 percent.
Meanwhile, when examined in terms of employment status, a majority of those in the informal sector at 38 percent cited tax avoidance as a major factor leading to low tax revenues. Most of those in formal employment at 32 percent were of a similar opinion plus the highest proportion of those who identified as unemployed at 26 percent held the same view.
At 65 percent, the North-Eastern region recorded the highest number of those who thought some Kenyans avoided paying some or any taxes, compared to the national average of 31 percent.
Generally, in terms of the other variables examined by the study, it is noteworthy that respondents from mostly rural settings view corruption or theft as a bigger problem, at 30 percent, as opposed to tax avoidance, at 29 percent.
In light of this, the Coast and Nyanza regions mainly view corruption as a more serious problem with a majority of 35 and 30 percent respectively.
Overall, 14 percent of those interviewed for the study said the Government didn’t meet its tax revenue target because the KRA targets were unrealistically high.
More women at 15 percent than men at 13 percent felt this was the case. Similarly, at 16 percent, most of those from urban areas were of the same view compared to rural residents at 13 percent. Youth’s view this as a problem at 15 percent as compared to those over 35 years, at 13 percent.
Also, most unemployed people at 17 percent view unrealistically high KRA targets as a major problem compared to 11 percent formally employed and 11 percent informally employed as well.
Kenyans are therefore increasingly making linkages between tax evasion, corruption, poor economic growth, and low revenues within the public finance cycle.
The two tax experts recommend that the Government must urgently address the problem of tax avoidance to bridge revenue collection shortfalls.
This is because as highlighted in The State of Tax Justice 2020: Tax Justice in the time of COVID-19 report by the UK based Tax Justice Network (TJN), Kenya is estimated to have had an annual tax loss of $565 million (about Ksh63 billion), of which an estimated $502 million (about Ksh56 billion) was due to corporate tax abuse, and an estimated $63 million (about Ksh7 billion) were losses due to offshore tax evasion.
This total tax loss is comparable to the number of 240,781 nurses’ annual salaries, thereby showing how it undermines service delivery in sectors such as health.
Meanwhile, rampant corruption involving theft of public funds reduces people’s urge to pay tax. For example, it is public knowledge that the country loses Ksh2 billion daily – or more than Ksh700 billion a year to corruption.
Mr Mosioma says people ask themselves certain questions to assure themselves that they can get away with tax avoidance. Such questions include: Will I get caught if I don’t pay taxes? If I get caught, will I be punished, or will I get away by bribing some officials? How severe will the punishment be when caught?
Mosioma further suggests that the country should put in place more robust systems to detect people who are not paying their fair share of tax.
Ms Jalipa says tax avoidance amounts to financial fraud and should be checked. For example, it is fraudulent for firms to declare lower profits to avoid paying higher taxes.
She says: “As tax justice activists, we have been advocating greater recognition of the scope and problem of illicit financial flows, including tax avoidance, in order for everyone, counting multinational corporations as well, to pay their fair share of taxes.”
Tax avoidance denies governments significant amounts of revenue which could have been used for development.
Once this happens, the government must then make up for the budget deficits, and this is often done by increasing consumption taxes, which hurt the poor the most, Ms Jalipa points out.
She says EATGN’s report on Revenue Collection and Economic Justice: Kenya National Tax Outlook 2021 is important because it reflects the social contract between Kenyan citizens and the state.
Ms Jalipa advises citizens to hold their governments to account on using the taxes that they pay for their welfare. The more the state taxes and spends for the benefit for their citizens, the stronger the social contract.
“Reports like EATGN’s Kenya National Tax Outlook 2021 allow us to reflect on the status we are at with this social contract and what we need to be doing to strengthen it,” says the Oxfam official.
Here is a brief video on sampled reactions from the public, regarding EATGN's latest survey:
The East African Tax and Governance Network (EATGN) is a civil society collaborative initiative of individuals and non-state actor institutions in the East African Community (EAC) that champions tax justice to achieve sustainable development. Tax Justice Network Africa (TJNA) is a Pan-African organisation that promotes socially just, accountable, and progressive taxation systems in Africa.
For more information, visit www.eataxgovernance.net