President Ruto’s tax targets leave KRA in a pot

President William Ruto, Deputy President Rigathi Gachagua and Prime Cabinet Minister Musalia Mudavadi

President William Ruto (centre), Deputy President Rigathi Gachagua and Prime Cabinet Minister Musalia Mudavadi at the Inaugural Retreat for Cabinet and Senior Ranks of the Executive at Fairmont Mount Kenya Safari Club, Laikipia County. 

Photo credit: PCS

Kenyans should brace themselves for new levies as President William Ruto races to up tax collection by 136 per cent in five years to support the government’s fast-rising spending needs, including burgeoning annual debt servicing costs.

Kenya’s annual debt servicing costs remain high – the National Treasury will spend Sh1.393 trillion to service debt by June – even as Dr Ruto pledges to go slow on borrowing, end subsidies, cut government spending and increase revenue collection to expand the fiscal space.

Dr Ruto has set a new target to collect Sh4.8 trillion in tax revenue by June 2027, which portends an additional tax implication of Sh1.1 trillion on top of the National Treasury’s earlier projections amounting to Sh3.77 trillion for the same period.

He primarily seeks to expand the narrow tax base to bring more people into the tax bracket to achieve his lofty revenue targets, and grow the economy to organically increase the tax paid. 

“We are beginning the journey to grow our own savings and revenues by making sure we have a plan on how to expand our tax base and digitising all government services to bring more people into the tax bracket,” said Dr Ruto in a joint-media interview on Wednesday.

The Treasury expects to collect Sh2.03 trillion by June, supported by “robust indirect and custom taxes on account of the pass-through of higher international prices and the somewhat weaker-than-originally-anticipated shilling,” the exchequer said.

The major target for Dr Ruto’s Sh4.8 trillion plan is growing income tax charged on corporations and individuals at a time when most individuals and businesses do not pay the tax. The Treasury had projected to increase income tax collection from Sh1.004 trillion this year to Sh1.734 trillion in 2027, but Dr Ruto’s new targets will accelerate the push to make more businesses and workers pay.

Recent data from the Kenya Revenue Authority (KRA) shows that while 759,164 businesses had registered for corporation tax, just 11.12 per cent (84,428) of these firms paid the tax in the year to June 2022, meaning that a chunk of the tax burden rests on the shoulders of a few payers.

President William Ruto during the 2022 Taxpayers' Day at the KICC

Trans Nation Sacco Society Limited receive the top MSES Taxpayer Northern Region award from President William Ruto as his deputy Rigathi Gachagua (centre), CS Treasury Prof Njuguna Ndung'u and Kenya Revenue Authority (KRA) Commissioner General Githii Mburu look on during the 2022 Taxpayers' Day at the KICC on October 28, 2022.

Photo credit: Diana Ngila | Nation Media Group

VAT growth

Further, some 83.3 per cent of employees outside of small-scale farming and pastoralism have informal jobs and do not pay income tax, according to the latest data from the Kenya National Bureau of Statistics. The Treasury had targeted to grow the value-added tax (VAT) collection from a projected Sh587.7 billion in June this year to Sh1.06 trillion in 2027, but Dr Ruto has set higher targets for the KRA.

VAT is charged on most consumer products, including fuel, electricity, cooking gas, manufactured foods, soft drinks and electronics, thus playing a critical role in the final prices. The President has now directed the taxman to scale up VAT collections by Sh220 billion by sealing revenue leakage following the migration from the Electronic Tax Register (ETR) to the Tax Invoice Management System (Tims). 

The new target is 74 per cent higher than the amount KRA had expected the transition to help realise as a bare minimum in additional VAT collection in the first full year of Tims implementation.

Dr Ruto said the transition to Tims, whose deadline elapsed on November 30, 2022, should help seal VAT leakages. According to the Treasury, VAT is the tax head worst affected by foregone revenue, with an average of Sh292 billion of potential collections not being realised annually. 

“We are installing a new tax system because, at the moment, we have been collecting 60 per cent of collectable VAT. Almost 40 per cent is not being collected because of pilferage here and there. The system we are installing is going to drive VAT collection to between 90 and 97 per cent,” Dr Ruto said in the televised interview.

Speaking to the Nation on December 1 last year upon the completion of the migration to Tims, KRA said it expected to net at least Sh126.7 billion more in VAT collections in Tims’ first full year.

Dr Ruto’s directive now places pressure on the taxman to seal revenue leakages. “We are estimating to bump up the VAT collection by at least 30 per cent within the first year of implementation and that is a modest estimation. Most countries that have implemented a similar transition would be looking at between 35 and 45 per cent increase depending on how compliant their taxpayers are,” said KRA’s chief manager in charge of Tims Hakamba Wagwe.

Excise duty – the third largest tax collected by the KRA – will also play a major role in achieving the tax plan. The KRA targets Sh297.2 billion in revenues from excise duty by June and expects to increase collection to Sh521.5 billion in 2027. The tax, also known as “sin tax”, is mostly charged on luxury goods such as perfumes, beer, alcohol, cigarettes and nicotine, but is also charged on water, juices and fuel. 

Adjusted annually in line with inflation, the government is betting on annual increases of the tax to meet its revenue needs, despite opposition from some experts that the tax is counterproductive as it slows down demand for the excisable goods.