Viewpoint: Gitahi Gachahi

The simplification of a tax system goes a long way towards ensuring compliance. There are two distinct ways of simplifying a tax system – enhanced legislation and effective tax collection – and their execution must be coordinated for exemplary results to be attained. Good legislation is well thought out and customised to the dynamics of a country’s business models. Effective tax collection can only be attained by having capable tax administration achieved.

In a report released in 2017, the Africa Tax Administration Forum noted that by rewriting outdated tax laws and then improving their enforcement, African nations could close the gap between the intentions and outcomes of tax policies and collect billions in public revenue, which would better equip the countries to tackle their development goals.

According to a World Bank estimate of data provided by the International Labour Organisation, Kenya’s 2017 rate of self-employment was 62%. This means that technically more than 50% of the GDP ought to come from the country’s informal economy. Therefore the government’s should concern itself with whether or not the tax system is adequately and efficiently collecting tax from this sector.

Moreover, Kenya has already made strides in trying to simplify the tax code. In 2007 the Income Tax Act was amended to introduce a turnover tax. The rate levied by the turnover tax is 3% of the gross receipts for a turnover of less than KSh5m ($49,000). The Income Tax Bill 2018 proposed to scrap this and instead introduce a presumptive tax, which will be calculated and levied as 15% of the business permit fee paid to a county government. The turnover threshold will remain the same. This presumptive tax is highly engineered for the informal economy. Paying for tax liabilities and business permit fees simultaneously simplifies the entire process and integrates taxes into the business systems, making it easier to comply. This is the hallmark of simplicity.

There have already been prior successes from such re-engineering. A case in point is the advance tax paid for commercial vehicles at the point of licensing, which has also increased compliance levels and bolstered cash flows for the Kenya Revenue Authority (KRA). Moreover, while it may increase the costs of starting a business, it will also significantly reduce the amount of taxes that would have otherwise been payable by taxpayers and save them the headache of having to go through a complicated tax system.

In 2015 the KRA rolled out i-Tax, an online filing platform that did away with the manual process. Beginning in 2016 all taxpayers were required to file online. This improved compliance levels by shortening the wait to extract revenue data and enhancing the accuracies of both the tax authorities and taxpayers when computing for tax. However, this system still demands that taxpayers have an in-depth understanding of IT and general tax laws, which a good number of Kenyans do not. Hence, the KRA should invest more in simplifying the system and developing programmes that raise taxpayer awareness.

The KRA could also follow the lead of regimes where such systems have proved workable. For instance, the UK has a simplified tax system (STS), which is an alternative method of calculating taxable income on the basis of straightforward financial affairs. The infrastructure should also be coded in a simplistic way to help the taxpayers better understand their tax obligations and provide easier ways of paying their liabilities and complying in general.

By February 2018 the KRA had a KSh68.3bn ($669.2m) tax collections deficit. The KRA, through concerted efforts with the National Treasury, should aim to improve both the law and the revenue-collection mechanism without necessarily increasing the tax burden of citizens. Attaining this will go a long way in helping the tax system to meet the crucial canons of taxation regarding productivity and simplicity.