16 January 2019

Kenya: How Kenya Plans to Increase Revenues, Fund U.S.$26.5bn 2019-20 Budget

Nairobi — Kenya Revenue Authority (KRA) is set to raise revenue to GDP ratio from current 18.3 per cent in 2017/18 to 19.2 per cent in 2020/21, in renewed efforts to support government spending.

This comes even as the 2019/20 proposed budget is set at US$26.5 billion (Ksh2.7 trillion).

Through its 7th Corporate Plan running from 2018-2021, KRA expects to collect US$59.9 billion (Kshs6.1 trillion) of core revenues - exchequer revenues, Road Maintenance Levy Fund (RMLF) and Railway Development Levy (RDL) - requiring an annual revenue growth of 12.9 per cent.

Key among the Plan's strategies and programs is tax base expansion aimed at raising the number of active taxpayers from 3.94 million to seven million, by implementing a segmented approach to deal with the identified sectors.

During the launch of the Corporate Plan presided over by National Treasury Cabinet Secretary Henry Rotich, KRA management expressed optimism that the blue print will steer the authority to a success in tax administration and consequently the Big Four Agenda.

"I believe a lot of effort has been put in the development of the seventh corporate plan and is expected to be a pivot in the success of the Big 4 Agenda," said Mr. Rotich at the event, held on Wednesday at KRA's headquarters-Times Tower, Nairobi.

The CS said the corporate plan focuses on the country's development agenda as spelt out in the Kenya Vision 2030, the Third Medium Term Plan (MTP 2018-2022), the Budget Policy Statement 2018 and the Big Four Agenda.

"We undertake to work with KRA and all stakeholders to continuously develop appropriate policies and review of the regulatory regimes to meet the needs of all Kenyans," the CS noted in his speech.

KRA board chairman Francis Muthaura noted that one of the fundamental drivers that will guide this plan is transformation agenda. The key focus of this transformation agenda is to become more customer-focused with a view to enhance compliance among the taxpayers.

"I am optimistic that we have the right ingredients necessary in making the dreams outlined in this ambitious plan a success," Dr. Muthaura added.

On his part, the Commissioner General Mr. John Njiraini said that the seventh corporate plan is designed to give priority to key national flagship drivers which project a transformed and a self-reliant nation in the years to come.

According to the Commissioner General, KRA's approach and engagement with the customers has significantly been shifting from enforcement to a more facilitative approach, an approach that has for a long time been associated with the private sector.

He said revenue mobilization is through transformation, data-driven decision-making and tax base expansion.

2019/2020 budget and targets

CS Rotich last week released the draft 2019 Budget Policy Statement( BPS) where he has proposed a budget of Ksh2.704 trillion (23.8 per cent of GDP) for the fiscal year 2019/20 , with recurrent expenditure taking the lion share of this spend.

To support the budget, KRA is expected to collect US$18.5 billion (Ksh1.88 trillion) in ordinary revenues (16.5 per cent of GDP), up from the revised US$16.2 billion (Ksh1.65 trillion) in the current financial year which ends June 30.

KRA has been missing its target in recent years hence the reforms are critical to help government fund its budget, while reducing borrowing to fill in the budget deficit.

In the 2019/20 financial year, the government expects to borrow US$3.01 billion (Ksh306.5) billion from foreign sources and US$2.7 billion (Ksh271.4 billion) from the domestic market to address budget gaps, with the overall fiscal deficit projected at US5.6 billion (Ksh572.2 billion)-5.0 per cent of GDP.

The country's budget deficit is however forecast to fall to 5.0 per cent of GDP in the 2019-20 fiscal year from a revised deficit of 6.3 per cent of GDP in 2018-19.

Revenue performance

Revenue collection for the first five months of the current financial year (July 2018- June 2019) grew by 13.5 per cent compared to the same period in the financial year 2017/18.

This strong growth is driven in part by a rebound effect, after the poor performance in the previous financial year as well as two months effect of the tax policy measures introduced in the Finance Act 2018.

Despite the strong growth, cumulative ordinary revenue still fell short of the November target by US$272.2 million (Ksh27.7 billion).

This shortfall however is expected to close in the second half of the financial year as the yields from the full impact of the revenue policy measures take effect and as the roll out of the Revenue Enhancement Initiatives (REI) being put in place by the Kenya Revenue Authority (KRA) is finalized.

" As the financial year progresses, we will closely monitor the performance of excise taxes and taxes from international trade and transactions (Import duty) which performed below the cumulative November 2018 targets," Rotich notes in his proposed budget.

Income tax from corporations which recorded negative growth as at November 2018 is expected to bounce back to target levels by third quarter due to the strong performance recorded in the economy in the first half of the financial year.

Income Tax from individuals, (P.A.Y.E) and Value Added Tax (VAT) remained largely on target and are expected remain on course into the second half of the year.

In nominal terms, total revenue collection including Appropriation in Aid (A.i.A) by November 2018 amounted to US$6.2 billion (Ksh633.7 billion), equivalent to 6.3 per cent of GDP, against a target of US$6.6 billion ( Ksh 677.0 billion), equivalent to 6.5 per cent of GDP.

The recorded shortfall of US$425.5 million (Ksh43.3 billion) was due to underperformance in ordinary revenue US$272.2milllion (Ksh 27.7 billion) and A.i.A amounting to US$153.3 million (Ksh15.6 billion).

On the other hand, revenues as a share of GDP are projected to rise from 17.3 per cent in the financial year 2017/18 to 18.3 per cent in the 2019/20 and further to 18.8 per cent in financial year 2022/23.

The additional resources are expected to support the fiscal consolidation programme and bring the fiscal deficit down to 3.0 per cent of GDP by 2022/23.

Reforms

To mobilize revenues, the government has put in place revenue enhancement measures to boost performance and cushion against further revenue shortfalls by strengthening tax administration and compliance.

Among measures is enhanced scanning of cargo to detect concealment and increase efficiency in cargo clearing through procurement of additional scanners and full integration of all scanners.

The government is also using the Regional Electronic Cargo Tracking System (RECTS) to ensure all goods reach the desired destinations and avoid dumping.

It is also using third-party information to identify non-compliant property developers and ensure they are included in the tax base.

KRA has also put in place measures to ensure detection of non-compliance through i-Tax data matching.

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