Humphrey Wattanga: Why KRA collections fell short in era of high taxes

The government doubled taxes on petroleum products this year alongside other measures geared at collecting Sh214 billion more this financial year.

Humphrey Wattanga was immediately picked to lead the Kenya Revenue Authority (KRA) in collecting the taxes as the commissioner-general. However, his agency is already missing its revenue collection targets after oil taxes, for instance, plunged by 8.6 percent to Sh71.7 billion in the first quarter to September from Sh78.5 billion at similar time last year despite the doubling of Value Added Tax (VAT) from eight to 16 percent from July.

Early this week, Mr Wattanga appeared before the National Assembly Committee on Finance and National Planning and was put to task to explain the Sh79 billion revenue miss in the first quarter of the 2023/24.

Below are excerpts.

What’s the analysis of the revenue collection over the past quarter compared to a similar period in 2022/23?

The KRA has in this quarter registered positive growth in revenue collection. Total revenue collection in the period July-September 2023/24 amounted to Sh586.9 billion against a target of Sh665.9 billion. This resulted in a performance rate of 88.1 percent, leading to a deficit of Sh79 billion and a growth of 8.4 percent.

Why was this the case?

The first quarter recorded a slowed growth of 8.4 percent resulting from below-par performance from both non-oil and oil taxes, corporation tax, PAYE and domestic VAT. Various economic parameters have deviated from expectation.

The Central Bank of Kenya (CBK) has for instance raised its benchmark interest rate to the highest level in seven years. Banks have consequently increased interest rates triggered by the rise in the central bank’s benchmark lending rate.

Additionally, there has been a dip in ministerial expenditure on development projects by more than half in the first quarter. This has slowed activity on projects such as roads, water, power plants, housing and electricity transmission lines.

There have also been unfavourable business conditions as evidenced by the PMI averaging at 48.46 points in the period January to September and operating below the 50-point mark in seven out of nine months in 2023.

The persistent low private sector business operations arise from cost pressures and a drop in customer demand, which has resulted in decrease in manufacturing output.

What strategies is KRA implementing to enhance revenue collection efficiency and effectiveness?

The KRA is implementing an ambitious strategy, jointly discussed with the Treasury and the President’s Economic Council. On tax amnesty, we are enacting a better publicity mechanism by enlisting other organisations to help reach a wider audience. We have also implemented real time collection of taxes given the positive impact it has on revenue mobilisation.

In betting and gaming, for instance, we have onboarded 92 of 130 firms for the real time collection of withholding tax and excise duty.

Collections from betting and gaming have subsequently grown by 67 percent from Sh366 million to Sh612 million.

What are the challenges in revenue collection?

There is a lack of visibility of business transactions in the informal economy. Taxing this sector remains a challenge mainly due to high administrative costs, lack of financial statements and a large number of unregistered enterprises.

There is also a huge debt portfolio with debt arrears standing at Sh1.097 trillion as at the end of September 2023. Principal debt is Sh1.014 trillion. Pending bills have also resulted in the non-payment of taxes due by suppliers of government entities which have hit cashflow. At the end of September 2023, taxpayers owed the KRA more than Sh15.5 billion.

How is KRA addressing some of these challenges?

On taxing the informal economy, we are collaborating with county governments in information sharing. We have also integrated our systems with those of telcos, CBK and financial institutions to view transactions.

To deal with non/under declaration of sales, we have fully rolled out the electronic tax invoice management systems to other taxes and restricted TIMS/eTIMS compliant invoices for income tax deductions.

What are KRA projections and targets for the second quarter?

The KRA is focused on meeting the 2023/24 target of Sh2.768 trillion that requires a growth of 27.8 percent over Sh2.166 trillion that was collected in 2022/23.

In particular, in the second quarter of the 2023/24, the target is Sh684.5 billion requiring a growth of 28.8 percent.

What’s the roadmap to achieving this target?

The target will be realised through leveraging technology with the view to simplify tax processes and facilitate trade in a bid to harness the revenue potential from consumption taxes, income taxes and trade taxes.

KRA is also betting on a tax amnesty programme. So far, KRA has collected Sh3.4 billion from the ongoing initiative with over 17,000 taxpayers having applied for the tax amnesty and are expected to remit Sh10.5 billion.

We have also deployed a team of over 1,400 revenue assistants to offer tax compliance support for taxpayers and facilitate data collection for tax base expansion initiatives including online registration of trading businesses, verification of taxpayer details, support compliance with TIMS and eTIMS regulations, excise regulations and data collection for data cleaning.

→ (email protected)