Businesses at the crossroads on State’s tough revenue measures

Members of the Traders and Importers Association

Members of the Traders and Importers Association camp outside Kenya Revenue Authority offices located at Times Towers protesting a delay in release of their goods in containers at the Mombasa depot.

Photo credit: File | Nation Media Group

Businesses are bracing themselves for tough times as the new government plans to apply spy-like monitoring on their operations, in Treasury’s new regulatory proposals to net tax cheats.

In a bid to help President William Ruto’s government achieve its Sh3 trillion revenue target in the 2023/24 financial year, the Kenya Revenue Authority (KRA) plans to not only integrate its systems with those of companies in different sectors to monitor their sales and production, but also hire more staff to physically check manufacturers’ production trends.

While the government views the move as sealing loopholes that tax evaders have used to dodge paying their due share to the taxman, economists and businesses have faulted the government's priorities.

In stating measures the government intends to use to raise enough revenues for the financial year 2023/24 and the medium term, the draft Budget Policy Statement (BPS) last week indicated that KRA plans a crackdown, particularly on manufacturers who are accused of under-reporting production volumes and sales.

“Going forward, KRA will address some of the challenges hampering enhanced tax compliance through the placement of resident officers to monitor production, providing strict timelines for factories to meet requirements, establishment of a Production Monitoring Command Centre to monitor production in real-time, enforce all factories to meet all factory requirements by use of metering and monitoring tools,” the draft 2023 BPS stated.

Excisable goods

This, the report said, is aimed at monitoring excisable goods produced by manufacturers, to end cases of under-declaration of excisable goods by rogue businesses.

KRA plans to proceed with full rollout of electronic Tax Invoice Management System (eTIMS), which has been proceeding, aiming to tackle cases of under-declaration of sales by businesses and use of fictitious input claims.

“KRA will address cases of missing trader phenomenon/non/under declaration of sales and use of fictitious input claims through the full roll-out of eTIMS, restriction to eTIMS compliant invoices for income tax deductions and deployment of big data analytics to drive compliance interventions,” said the statement.

The Kenya Association of Manufacturers (KAM) says the announced measures portray a mismatch between the new government and realities in Kenya’s business environment, faulting the State of merely focusing on chasing revenues, rather than addressing challenges facing firms in order to spur growth in production and taxes.

KAM Chief Executive Anthony Mwangi told Smart Business that already KRA is monitoring the production of manufacturers in different lines and that even those not being actively spied on comply with paying taxes to avoid rubbing KRA the wrong way, due to its historical punitive approach.

“The move is unlikely to realise anything much because already even now due to the punitive nature KRA has operated in, many businesses have made sure that they comply with all laws and paying taxes to avoid crossing the authority the wrong way. In terms of revenues they will not realise much.

“KRA already has many avenues to verify information on production by companies starting from point where companies import. The government is focusing on the wrong thing, instead it would have worked to enhance efficiency in the taxation regime,” said Mr Mwangi.

KAM argues that tackling illicit trade- which has seen substandard and untaxed goods flood the market- would have better impact for the government and law-abiding businesses since it would grow revenues for both.

Informal businesses are also headed for a tough time from a tax regulation perspective, with the government planning a crackdown to tap a possible Sh2.8 trillion in taxes from the millions of businesses across the country.

“The potential taxable base of the informal sector is Sh2,800 billion (Sh2.8 trillion) as per the MSME survey,” Treasury stated.

10 million businesses

Kenya’s MSME economy is estimated to have over 10 million businesses and contribute to about 85 percent of non-farm jobs, but many remain informal and operating without government support.

President Ruto has been strongly advocating for the growth of MSMEs in the country through formalisation and growing their access to affordable credit, the basis on which he introduced the Hustler Fund.

University of Nairobi (UoN) Economics lecturer Samuel Nyandemo faults the Treasury for the announced measures, indicating that most had been introduced by the previous government and that what the State needs to do is prove to taxpayers that their taxes are being put to good use.

Dr Nyandemo also argues that the new government seems to contradict itself, by pushing KRA to apply empathy to taxpayers and accusing its previous measures of being harsh, while at the same time exerting pressure on it to grow revenues.

“To ask KRA to apply empathy while collecting taxes is encouraging laxity. It’s blindfolding Kenyans to see the government as having a human face, which is likely to make Kenyans think they can fail to pay taxes and walk scot-free,” he told Smart Business