Why income tax compliance levels are low in Kenya

If the government wants its people to pay their taxes, they need to improve the quality of services provided. file photo | nmg  

By IBRAHIM KHALIF

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Summary

• Employment statistics also paint a grim picture for tax compliance level.
• According to the 2017 Economic Survey, an estimated 15.1 million people were in employment in 2015, with a projected increase rise to 16 million in 2016.
• This means that less than 20 per cent of eligible individual taxpayers filed their returns for 2016 in time.

The month of June has been a busy one for the tax authority, practitioners, auditors, taxpayers and corporates with December year-end due to June 30 deadline for filing of 2016 income tax returns.

Unlike last year, the iTax system started experiencing interruptions early, especially in the last two weeks of the month even though on the last day, it normalised earlier (from 1pm) than last year (from 10pm).

The downtime is attributed to the heavy traffic experienced due to our ‘‘habit’’ of last minute rush to file the returns.

Despite Kenya Revenue Authority’s (KRA) media campaigns for taxpayers to file their returns, only 2.4 million people heeded the call to file their returns. Granted, it was a substantial increase from the previous year, but that was a fraction of taxpayers in the authority’s database. These numbers are very low by any of the measures set out below.

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From bank accounts’ perspectives, Central Bank of Kenya’s (CBK) banking supervision report for 2015 showed that there are 35 million deposit account holders. Arguably, some taxpayers hold multiple bank accounts — if we take the unlikely scenario of each taxpayer holding three bank accounts, this translates to 11.6 million persons.

We can further adjust downwards the figure of 11.6 million to 10 million to cater for other factors. These include persons who file their returns under monthly turnover tax and monthly rental income who are not required to return such income in an annual tax return. Others are non-December year-end entities, exempt persons and persons without incomes.

Employment statistics also paint a grim picture for tax compliance level. According to the 2017 Economic Survey, an estimated 15.1 million people were in employment in 2015, with a projected increase rise to 16 million in 2016. This means that less than 20 per cent of eligible individual taxpayers filed their returns for 2016 in time.

The compliance level is still low if one were to use National Social Security Fund and National Hospital Insurance Fund data, which put registered members in 2015 at 4.38 million and 5.27 million respectively with a rise to 4.5 million and 6.1 million respectively in 2016, according to the survey.

A study of micro, small and medium-sized establishments in the 2017 Economic Survey estimates 7.4 million such establishments. This signals that a large number of them are outside the tax net.

In a request for proposal (RFP) to support tax base expansion and revenue enhancement initiatives issued early in the year, the KRA admitted that it has 8.1 million taxpayers in its database out of which only 2.9 million are active, representing 36 per cent of taxpayers in its database.

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A study on tax evasion and tax avoidance in developing countries published by GIZ in 2010 gave a number of reasons for low compliance that included low tax morale, high compliance costs and weak enforcement of tax laws.

On the tax morale front, first, the quality of public services provided affects willingness to pay taxes. Therefore, if the government wants its people to pay their taxes, they need to improve the quality of services provided.

Second, the tax rates and the overall structure of the tax system affect the disposition to evade or avoid tax. If they had choice, many people would not allow a situation where 30 per cent of their income/profit is taken away as tax. This calls for lowering the rates of taxes to lessen the tax burden and bring more people into the tax net.

Third, low level of accountability and transparency in the use of public resources creates distrust of the tax system and government thus leading to the willingness to evade taxes.

Fourth, misuse of tax revenue by officials entrusted with its management affects tax morale thus leading to evasion. If a dishonest taxpayer knows that the cost of bribing a tax officer is lower than potential benefit from tax evasion, he will not hesitate to evade tax.

Fifth, a lack of rule of law reduces the transparency of public institutions and fosters distrust among the citizens thus affecting citizens’ willingness to pay tax.

With the introduction of electronic filing of tax returns, high tax compliance cost should no longer be a factor hindering tax compliance. However, the KRA continues to face capacity challenges making it difficult for it to keep a tab on taxpayers due to the large informal sectors as reported in 2017 Economic Survey.

In conclusion, as a society, if we continue to pay lip service to our national values and principles of governance, which include patriotism, equity, social justice, good governance, integrity, transparency and accountability, the challenges of tax evasion will continue. This is despite numerous laws we enact and severity of penalties we impose as is the case with the recently enacted Tax Procedures Act.