KENYA S REVENUE STUDY FY

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INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS OF KENYA

PERSPECTIVE TO REVENUE PERFORMANCE IN KENYA ICPAK 25 TH

PUBLIC POLICY & GOVERNANCE DEPARTMENT THURSDAY,

1 INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS OF KENYA KENYA S REVENUE STUDY FY A HISTORICAL PERSPECTIVE TO REVENUE PERFORMANCE IN KENYA ICPAK 25 TH ECONOMIC SYMPOSIUM Presented by : Naomi Rono ICPAK PUBLIC POLICY & GOVERNANCE DEPARTMENT THURSDAY, February 16 th School of Monetary Studies (KSMS)- Nairobi City County

2 BACKGROUND OBJECTIVES METHODOLOGY RESEARCH FINDINGS POLICY RECOMMENDATIONS

3 BACKGROUND Taxation is the only known practical means of collecting resources in order to finance public expenditure for goods and services consumed by the public (public goods). In Kenya, Taxation is the largest source of government Revenue. Several Countries in Africa rely on commodities to generate revenue (e.g. Angola, Nigeria, South Africa) Kenya is looking at Oil to generate additional revenue. Taxation could be a means to hedge against the risks associated with reliance on commodities.

4 What triggered the inquiry? The budget for the FY 2015/2016, the fifth (5th) annual budget under the Constitution of Kenya 2010, saw the release of a KES 2.2 Trillion budget. (2.65 T, 2017/2018) The size of the budget prompted discussions regarding the country s capability to raise the revenue to fund its expenditure plans KRA ability to meet its revenue targets, given that Kenya s revenue portfolio is highly driven by tax revenues ( How are our revenues forecasted?) Government s plans to roll out a significant number of infrastructural development & overall vision 2030 (Likely to compound the budget financing challenges)

5 What outcomes do we anticipate? The analysis provides an objective assessment of Kenya s past revenue performance (FY ) We anticipate that the study will yield the following; Will be valuable in the design, formulation and execution of sound fiscal and macroeconomic policies. For sustainability and stability in revenue generation. Valuable for budget planning for subsequent financial years. Revenue forecasts define the resource envelope and forms the basis for effective medium-term planning. (Does our resource envelop direct our expenditure or vis versa); ( Are our revenue targets realistic?)

6 What was the scope of the study? A historical analysis of the revenue performance between FY 2010/2011 until FY 2014/2015 Focused on revenue collected by the National government The study assess the trends as well as revenue yield for the period. Utilized performance indicators to assess tax & non-tax revenue performance Information Source Due to the asymmetry in fiscal information, the analysis relied on revenue data provided by the KNBS 2015 Statistical Abstract. In analysing tax efficiency, the study also utilized quarterly revenue data provided by the KRA for the FY 2005/2006 to FY 2014/2015

7 To establish the trend of tax and non-tax revenue performance for FY 2010/2011 FY 2014/2015 To examine the strengths and weaknesses facing revenue raising capabilities in Kenya. To provide information and recommendations to aid revenue forecasting.

subject matter Employed a multiplicative model to historical time series data in order to adjust for seasonality

8 1. Desk Research 2. Multiplicative model 3. Tax Buoyancy Model Analysed various reports government departments, agencies and entities on the respective subject matter Employed a multiplicative model to historical time series data in order to adjust for seasonality and irregularity in the revenue data Used to evaluate the response of the individual taxes to changes in National Income levels, in order to establish the productivity of the tax system

9 The research utilized the following performance indicators; 1. Tax revenue to GDP ratio 2. Revenue growth rate 3. The tax buoyancy rate to establish Kenya s revenue performance & tax responsiveness over the study period

10 1. Kenya s revenue portfolio is significantly driven by tax revenue. Kenya s total revenue averaged 24% of GDP. Overall tax contribution to the revenue portfolio between the years 2010/ /15 averaged 96% while non-tax revenue accounted for 4%.

11 Revenue in KES Millions % of Tax Revenue to GDP 1,400, Revenue performance : % 1,200, % 29.48% 30.00% 25.97% 1,000, % 25.00% 800, % 21.13% 5.43% 22.18% 20.00% 4.08% 600, % 96.89% 15.00% 96.36% 400, % 95.92% 94.57% 10.00% 200, % % 2010/ / / / /2015 Fiscal Year TOTAL TAX REVENUE TOTAL NON TAX REVENUE TAX REVENUE AS A % OF GDP

12 2. The analysis indicated there has been an increase in collection of taxes in the country the country s total revenue significantly increased from KES 651 billion in 2010/2011 to KES 1.1 trillion in 2014/2015 representing a 44% increase in revenue in 5 years The growth is largely attributed to increases in income tax, which increased from KES 272 billion in 2010/2011 to KES 542 billion in 2015, equivalent to 50% increase in collection.

13 Total Revenue KES Millions % Growth in Revenue Revenue Growth 1,400, % 1,200, % 18.90% 20.00% 1,000, , % 11.38% 11.33% 600, % 400, , % / / / / /2015 Fiscal Year 0.00% TOTAL REVENUE % Growth in Revenue

14 3. The Primary contributor to tax revenue is income tax, Direct taxes, being Income Tax on labour and capital, therefore drive the tax revenue structure of the country 96% of Kenya s revenue is generated through taxation (FY ) Direct taxes, contribute an average of 45% to tax revenue ( FY ) Is this sustainable? Number of registered tax payers as at Million taxpayers in an economy of 40 Million

15 % of Tax Revenue 30.0% Proportion Proportion of Tax of Tax Revenue Revenue Trend Trend 25.0% 23.02% 20.42% 25.12% 22.15% 26.16% 26.43% 26.52% 22.68% 21.13% 21.46% 20.0% 15.0% 10.0% 7.35% 7.43% 7.55% 7.15% 6.90% 5.0% 4.10% 3.78% 3.50% 3.78% 2.33% 0.0% 2010/ / / / /2015 Fiscal Year Income Tax (PAYE) Income Tax (Corporation, Individual,Advance & Withholding) VAT Domestic VAT on imports Excise Taxes Taxes collected as AIA Customs Duties

16 Tax Revenue in KES Millions 1,200, Tax Revenue Trends ,000, , % 10.81% 12.98% 600, , , % 11.21% 12.93% 11.34% 12.33% 11.40% 12.86% 13.64% 21.46% 13.03% 11.88% 11.71% 21.13% 14.40% 22.68% 22.15% 20.42% 26.52% 26.43% 23.02% 25.12% 26.16% 2010/ / / / /2015 Income Tax (PAYE) VAT Domestic Excise Taxes Fiscal Year Income Tax (Corporation, Individual, Advance & Withholding) VAT on imports Taxes collected as AIA Customs Duties

17 1. Income Tax The performance of Income tax between FY 2011/2012 to 2012/2013 reflects a decline in PAYE followed by a significant increase in 2013/2014 and thereafter declining by 5%. 2013/2014 that attributed the sharp increase in PAYE tax revenue to the implementation of devolution, which introduced the County payroll. The performance of PAYE as a proportion of tax revenue indicates that PAYE registered a steady marginal increase between the years reflective of the minimal policy initiatives implemented to reform the income tax regime in Kenya

18 % Change in Income Tax 30% Income Tax Trend ( ) 25% 20% 15% 10% 5% 0% 2011/ / / /2015 Income Tax (PAYE) Income Tax (Corporation,Individual,Advance & Withholding)

19 % of Tax Revenue 30.0% Proportion of Tax Revenue Trend 25.0% 23.02% 20.42% 25.12% 22.15% 26.16% 26.43% 26.52% 22.68% 21.13% 21.46% 20.0% 15.0% 10.0% 7.35% 7.43% 7.55% 7.15% 6.90% 5.0% 4.10% 3.78% 3.50% 3.78% 2.33% 0.0% 2010/ / / / /2015 Fiscal Year Income Tax (PAYE) Income Tax (Corporation, Individual,Advance & Withholding) VAT Domestic VAT on imports Excise Taxes Taxes collected as AIA

20 2. VAT VAT on Domestic goods increased significantly between the FY 2013/14 and FY 2014/15. This was attributed to the implementation of the VAT Act 2013 that applied the standard rate to more goods and services. The reintroduction of withholding VAT may also have had an impact on the increased collection of domestic VAT. There was also a year on year reduction in the import VAT due to the harmonization of the EACMA in line with the regional integration efforts aimed at reducing tax rates on imports

21 40% 35% VAT Trend ( ) 30% 25% 20% 15% 10% 5% 0% -5% 2011/ / / / % -15% VAT Domestic VAT on imports

22 2. Customs and Excise Customs and Excise duties account for and an average of 7.2% and 11.4% respectively, of the total tax revenue collected over the 5-year period. The administration of Customs duty in Kenya is underpinned by the East Africa Community Customs Management Act (EACCMA) of As such, any customs policy interventions are based on consultations with member states. Do we anticipate increases in excise with new excise act? (VAT 2013)

23 25.0% 20.0% Excise & Customs Trend ( ) 19.11% 19.74% 15.0% 10.0% 8.59% 5.0% 0.0% -5.0% 2011/ / / / % Excise Taxes Customs Duties

24 Tax Buoyancy Tax buoyancy measures the total response of a tax to a change in income. It shows the growth that results from the automatic growth of the base, occasioned by an increase in the National Income. Thereby measuring efficiency of a tax system. The analysis has established that PAYE registers the highest coefficient of buoyancy, however, still below the coefficient necessary for taxes to be considered buoyant.

25 Revenue Classification Buoyancy Coefficient PAYE 0.93 Other Income 0.85 VAT 0.66 Excise 0.35 Customs 0.66 Overall Tax Revenue 0.73

26 1. DIRECT TAXES Implement means tested tax incentives Align tax incentives to the overall economic agenda of the county Tax Incentives to boost economic activity, should reflect the overall development agenda of the Country ( Vision 2030, MTEF etc) Design incentives with emphasis on the analysis of the costs and benefits prior to their adoption Review the income brackets Currently, Kenya applies a progressive income tax, however Inflation has reduced the value of these income brackets substantially.

27 Fast Track the reform of the Income Tax regime Our analysis has indicated the tax revenue contributes over 90% of the revenue collection in the country. Any delayed review will affect the realization of revenue targets. Shift revenue reliance away from direct taxes A shift from direct taxes to indirect taxes might exert a beneficial effect on employment levels and GDP even at unchanged overall revenue levels. This will also ensure that a larger proportion of the population is contributing to the tax net as consumption increases.

28 2. INDIRECT TAXES Address the progressivity of VAT The progressivity of VAT has been achieved through the exclusion of basic necessities, however several proposals have been tabled to zero rate the basic consumer commodities in order to reduce the cost of basic goods. Exemption is not an appropriate treatment for essential goods because manufacturers cannot claim input VAT, therefore pass on the cost to consumers.

29 Apply a graduated approach to VAT We recommend that a graduated VAT approach be applied; VAT rate is split into three categories namely; firstly, a lower rate for basic consumer commodities which could be set at maybe 30% of the standard rate, a standard rate for all the other commodities ( currently at 16%) Higher rate for specific commodities which are considered luxury items. This could be set at 130% of the standard rate.

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30 Q & A Find the copy of the full report at the ICPAK Website or via ANALYSIS pdf Contacts: Naomi Rono naomi.rono@icpak.com

INCOME TAX POLICY Looking Ahead

INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS OF KENYA INCOME TAX POLICY Looking Ahead Presentation at the 4 th Annual Tax Convention Presented by : CPA Fredrick Riaga Chief Manager Public Policy and Research