As KRA rolls out innovative approaches to tax administration, it should not be lost on the authority that dealing with resistance is part of change management.
Kenya’s perennial national budget gaps have become a huge bottleneck to the country’s fiscal consolidation effort. In the current financial year, for instance, the fiscal deficit is estimated at Ksh 923.2 billion, against a national budget of Sh4.29 trillion.
The deficit, which stands at approximately 4.8 per cent of the country’s nominal GDP, is proposed to be financed by Sh635.5 billion in net domestic borrowing and Sh287.7 billion from external sources.
Borrowing, whether from domestic or offshore sources, is not entirely good for the economy. Domestic borrowing puts upward pressure on interest rates, leading to a higher cost of capital, reduced borrowing by private enterprises, slow-paced capital formation, and compromised tax base expansion.
On the other hand, external debt causes greater revenue outflows, thus posing governance challenges and deepening indebtedness to offshore lenders. This undermines the country’s financial independence and punctures its sovereignty.
The country’s immediate goal is to attain debt sustainability by reducing the fiscal deficit to 2.7 per cent of nominal GDP by the 2028/2029 financial year. Two things stand between Kenya and its fiscal consolidation goals: inadequate tax revenues (income) and burgeoning public debt (expenditure).
This article addresses the income side of the public finance management equation. Modernised tax administrations are increasingly leveraging digital platforms and artificial intelligence (AI) to access pertinent data and information on taxpayers’ commercial transactions, thereby making revenue collection more intelligent.
The Kenya Revenue Authority (KRA) started its revenue administration reforms and modernisation journey in earnest in the 2003/2004 financial year. This phase of reforms, dubbed the Second Generation Reforms, targeted human resource revitalisation, modernisation of internal processes, value co-creation with customers and partners, and strengthening revenue mobilisation and accountability systems and processes.
Revenue collection
Following the successful reforms programme, revenue collection increased by Sh132.1 billion, from Sh228.6 billion in FY 2003/2004 to Ksh 360.7 billion in FY 2004/2005, representing approximately 58 per cent revenue growth in one financial year. Arising from the impressive dividends of modernisation, KRA has, over the years, intensified its efforts towards achieving an efficient and responsive tax administration that is fit for purpose.
KRA has recently reiterated its commitment to deepening the digitalisation of its processes in a bid to foster a data-driven tax administration and expand its tax base.
I believe this is a significant stride in the right direction. For the longest time, the tax burden has disproportionately been carried by payroll employees, who lack the wherewithal to avoid it, and large enterprises with conspicuous visibility to the tax authorities.
Tax Base Expansion (TBE) will help KRA extend its reach to sectors that have hitherto not paid their commensurate tax liabilities. To achieve this objective, KRA should leverage technology to provide taxpayer service solutions. It is estimated that up to 45 per cent of the Kenyan economy is informal, relying heavily on cash transactions.
KRA faces significant challenges with respect to the traceability and capture of taxable commercial activities conducted in cash. Digitalisation enhances tax compliance and reduces opportunities for evasion. Digital tools that facilitate e-filing, e-invoicing and data-matching systems significantly enhance the supervisory capability of tax administration, deter tax misreporting and boost revenue collection.
In this regard, KRA should extend the scope of its Electronic Tax Invoicing Management System (eTIMS) to include non-VAT-registered taxpayers, to enhance visibility of commercial transactions. Further, KRA should intensify the use of advanced analytics, such as tax-income models and AI engines, to help identify tax cheats and non-compliant taxpayers more effectively.
KRA collects vast amounts of data through its digital and other channels. The use of data analytics would be critical in building cognitive and predictive modelling for taxpayer segmentation and risk analysis, enabling more informed, data-driven policy decisions and a targeted compliance roadmap.
A robust tax-income model would predict taxable income based on taxpayers’ assets and consumption patterns, with tax becoming an output of this model. It has been cumbersome for tax administrators to physically trace taxpayers’ assets and cross-match them with information in KRA databases. Consequently, many taxpayers have perennially failed to pay taxes commensurate with their incomes.
KRA can leverage digital platforms to enhance tax administration efficiency, improve tax compliance, reduce administrative and compliance costs, and provide better taxpayer services.
A practical way through which KRA could achieve reduced compliance costs is to increase its footprint beyond Huduma Centres and embrace agent models to offer mundane services in the tax ecosystem. This would allow tax officials to focus on more complex issues requiring human judgment, including tax calculations, online portals for tax payments, and payment processing.
For instance, partnering with Equity Bank and Kenya Commercial Bank, with their elaborate networks of about 80,000 and 20,000 agents respectively, would enable KRA to extend taxation services to the doorsteps of thousands of taxpayers, thus tremendously enhancing compliance.
At the same time, KRA should explore simplified, technology-enabled solutions to facilitate taxpayer registration, filing, declaration, payment, and review of self-assessment returns, making tax compliance a seamless, convenient and satisfying experience. Digital systems increase transparency in processes and reporting, which helps build public trust in the tax administration.
One of the glaring bottlenecks to Kenya’s tax administration has been KRA’s inability to domesticate its taxation services to address diverse business models. For instance, by sticking to the due-date system, KRA effectively locks out sectors such as matatu, boda boda and jua kali, whose members earn income daily. This group requires a system that allows for daily tax payments. To effectively bring these high-potential sectors into the tax net, KRA must re-engineer its core tax administration systems to address the unique needs of thousands of members countrywide.
KRA is increasingly embracing global best practices in tax administration, as evidenced by growing revenue collections despite the absence of additional tax-raising measures. In FY 2024/2025, for instance, KRA realised total tax collections of Sh2.57 trillion, compared to Sh2.27 trillion collected in FY 2023/2024, representing 6.8 per cent revenue growth. To continue on this trajectory, the authority requires tremendous political goodwill and the support of all Kenyans. Unfortunately, history is replete with backlash emanating mainly from tax evaders and their accomplices.
At the advent of KRA’s Second Generation Reforms in the early to mid-2000s, various business associations countrywide enlisted the services of politicians to air grievances against reforms they perceived to be overly intrusive.
As KRA rolls out innovative approaches to tax administration, it should not be lost on the authority that dealing with resistance is part of change management. In the era of social media, where some individuals operate like “economic mercenaries” for hire, KRA should not be taken aback if some of its senior officials, especially the Commissioner-General and revenue commissioners, become targets of online bullying and backlash. In extreme cases, these officials may even be falsely accused of engaging in corrupt practices, so that their fight for financial independence through domestic resource mobilisation may lose momentum.
Their only “sin” is that they have developed or acquired tax administration systems capable of “smoking out” tax evaders. Kenyans must protect KRA officials from attacks by hired economic saboteurs who may be using social media to undermine them on account of their official duties.
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Professor Ongore is a Public Finance and Corporate Governance Scholar based at the Technical University of [email protected]
