Challenges facing the tax system, tax reforms and the future of taxation: Kenya’s case study

1.0 Introduction

A tax system is a legal framework through which government collects revenue from its citizenry. Tax is the main weapon used by the government to raise enough revenue. Taxation is generally targeted at meeting two major objectives.[1] First, it is meant to raise revenue sufficient to fund public expenditure without too much public sector borrowing. Second, it is used in revenue mobilization with an aim of enhancing equity while at the same time minimizing taxation disincentive effects.[2]

Taxation in Kenya is provided in Article 209 of the Constitution, which empowers the National Government to impose Income Tax, Value-Added Tax, Excise Duty, Customs Duties and other duties on imports and exports, as well as any other tax which may be provided for through an Act of Parliament or County Assembly.[3] The Article also empowers the County Governments to charge property rates, entertainment taxes and any other tax authorized by an Act of Parliament. Additionally, both the National and County Governments are allowed to impose charges for the services they provide.[4]

Article 210 of the Constitution specifies that taxes can only be imposed, waived or varied through an Act of Parliament.[5] In addition, Article 201 of the Constitution stipulates that the National and County Governments shall equally share the tax burden and national revenue raised.[6] Further, Article 201 of the Constitution sets out the principles of public finance which tax laws, administrative processes and procedures are expected to be adhered to.[7] In addition, the Public Finance Management Act, 2012 prescribes the fiscal responsibility principles including a requirement for a reasonable degree of predictability with respect to the level of tax rates and tax base.[8] In addition to the Constitution and the Public Finance Management Act of 2012 (PFMA), the National Government is responsible for enforcing several tax and tax administration regulations. They consist of;

The Income Tax Act that provides for ascertainment, assessment and collection of tax on income.[9] This Act was enacted in 1973 and came into effect in January 1974. The Value Added Tax Actthat provides for the imposition of value added tax on goods and services made in, or imported into Kenya.[10] The Excise Duty Act thatprovides for the charge, assessment and collection of Excise Duty on excisable goods and services.[11] The Tax Procedures Actprovides for the harmonization and consolidation of procedural rules for the administration of tax laws in Kenya.[12] The East African Community Customs Management Actprovides for the management and administration of customs-related matters in the EAC region.[13] The Miscellaneous Fees and Levies Actprovides for the imposition of fees and levies on goods imported into the country for consumption in Kenya and export duties to encourage value addition on exports.[14] Tax Appeals Tribunal Act[15] which  provides for the establishment of a tribunal for the management and administration of tax appeals. Kenya Revenue Authority Actprovides for the establishment of the Kenya Revenue Authority, which is a central body for the assessment, and collection of revenue, for the administration and enforcement of the laws relating to revenue and to provide for connected purposes.[16]

1.1 Challenges facing Kenya’s tax system

The tax system in Kenya faces many challenges that negatively affect revenue collection. For instance, despite significant government investment in reforming the tax structure, Kenya’s revenue yield is still below the targeted East African Community target of 25% of GDP required for EAC Monetary Union. Particularly, over the past ten years, ordinary revenue as a proportion of GDP had decreased from a high of 18.2 percent in the Financial Year 2013/14 to 13.8 percent in the Financial Year 2020/21. The underlying problems affecting the tax system are highlighted by this development.

Existence of hard to tax sectors

The Kenyan economy is dominated by subsistence agriculture and a large informal sector, which are difficult and uneconomical to tax. Whereas the informal sector is expanding, its contribution to revenues remains low as it is largely cash based and characterised by poor record keeping. This has led to overreliance on the formal sector for tax revenue.[17]

Developing countries face formidable challenges when they attempt to establish efficient tax systems. First, most workers in these countries are typically employed in agriculture or in small, informal enterprises. As they are seldom paid a regular, fixed wage, their earnings fluctuate, and many are paid in cash, “off the books.” As a result, modern means of raising revenue, such as income taxes and consumer taxes, play a diminished role in these economies, and the possibility that the government will achieve high tax levels is virtually excluded.[18]

1.2 Tax incentives

The tax laws provide a number of tax incentives. They include tax exemptions, tax deductions, allowances, tax deferral, and preferential tax rates, as well as timing guidelines like capital asset accelerated depreciation. The incentives reduce the tax base and force the government to forgo tax revenue estimated at 2.96 percent of GDP as of 2020 compared to the average for African countries of 2.9 percent, even though they are intended to encourage investments and provide relief to low-income earners and vulnerable groups in society. This has a detrimental effect on generating revenue and carrying out the nation’s development programs.[19]

1.3 Low tax compliance

In the Financial Year 2020/21, the tax compliance rate was 68 percent for submitting tax forms and 88 percent for paying taxes. The technical and complex nature of tax laws and procedures, taxpayer apathy, high compliance costs, insufficient sharing of taxpayer information among National and County Government agencies, lack of KRA offices physically present in some locations, and a deficient taxpayer education program are the main causes of low compliance levels. These factors make it challenging for taxpayers to submit returns and make the necessary tax payments.

1.4 Complexity in taxing the emerging digital economy

The tax system is not fully equipped to deal with emerging technological business models. This has led to some business activities being left out of the tax net and especially the activities carried out through the internet on a digital platform. These business activities can be carried out in a tax jurisdiction without having physical presence in that jurisdiction.[20]

1.5 Customs administration

Dynamics in international trade including, emerging business models, new trading partners, increased security threats, organized crimes and an increasing number of regional free trade areas that Kenya is a member of, present challenges in Customs administration. Specifically, the customs administration faces the following main challenges:

Inadequate modern technological equipment for use at entry/exit border points to address misdeclaration and misclassification of goods, inadequate customs border posts that promote the infiltration of counterfeits, smuggling, and diversion of goods, inadequate staff capacity and training, inadequate cooperation, coordination, and collaboration among Government agencies on customs and border management matters and inadequate customs-to -to-customs regional cooperation to curb abuse of rules of origin.[21]

1. Tax administration

The role of tax administration includes management, direction and supervision of the implementation and application of tax laws and tax conventions to which Kenya is a party. Tax administration includes assessment, collection, enforcement, litigation, publication and statistical gathering functions under the various tax laws or conventions. Only a small number of persons issued with Personal Identification Numbers (PIN) pay taxes, a high number of unregistered taxpayers, low tax morale due to inadequate tax-payer education and information, inadequate preparedness to deal with emerging challenges and limited collaboration and information sharing between the National and County Governments on tax matters.[22]

Dispute resolution has also been a challenge facing the Kenya’s tax system. Lack of independence of the Tax Appeals Tribunal and out of Court or Tribunal tax dispute resolution processes. Facilitators of dispute resolution in cases to be settled out of Court or Tribunal are appointed by the Commissioner who is a party to the dispute.[23]

Moreover, International Taxation and Tax Treatieshave been a challenge to Kenya. Multinational Enterprises (MNEs) with a sizable presence in Kenya are a key source of money for the government and derive revenues from the country. The opportunity to participate in tax planning has grown as a result of increased globalization, including the setting up of enterprises to reduce worldwide tax liability, frequently by transferring profits to low-tax jurisdictions and manipulating tax residence status.

Most of the treaties that have been negotiated do not have provisions to address Base Erosion and Profit Shifting. Specifically, tax treaties and international taxation are faced with the following main challenges:  Lack of policy on avoidance of double taxation and fiscal evasion to guide negotiations between Kenya and other tax jurisdictions, some Double Taxation Agreements (DTAs) in force were concluded many years ago and hence not in line with the recent international best practice, abuse of tax treaties by multinationals, inadequate mechanism to address base erosion and profit shifting by MNE, insufficient technical capacity on international taxation; and emerging and evolving business models that cannot be adequately addressed by existing taxation frameworks.

2.0 Tax reforms that Kenya has adopted (policy and administrative reforms)

Kenya’s tax system has undergone continual reform over the last twenty years. On the policy side, rate schedules have been rationalized and simplified, a new value-added tax introduced, and external tariffs brought in line with those of neighboring countries in East Africa. At the same time, administrative and institutional reforms have taken place. Most notable among these was the creation of the semi-autonomous Kenya Revenue Authority (KRA) in 1995, which centralized the administration of tax collection.[24]

This section’s aim is to provide a broad overview of the Kenyan tax system, the reforms that have occurred over the decades, and the administrative structures in place.

Kenya Revenue Authority (KRA) digital transformation journey

The Organization for Economic Cooperation and Development OECD (2018) defines digital transformation, digitization and digitalization as follows: Digital transformation refers to the economic and societal effects of digitization and digitalization. Digitization is the conversion of analogue data and processes into a machine-readable format. Digitalization is the use of digital technologies and data as well as their interconnection that results in new or changes to existing activities.[25]

The Kenya Revenue Authority (KRA) was established in 1995 to serve as the government of Kenya’s tax collection organization. Kenya Revenue Authority Actprovides for the establishment of the Kenya Revenue Authority, which is a central body for the assessment, and collection of revenue, for the administration and enforcement of the laws relating to revenue and to provide for connected purposes.[26] KRA has been at the forefront of the government of Kenya’s transformation efforts through technology adoption and business process reengineering because it is aware of the crucial role it plays in the growth and development of Kenya.

In 2003, the Authority embarked on the implementation of the Revenue Administration Reforms and Modernization Program (RARMP) whose objectives included simplification of the Tax System to foster compliance and therefore enhance revenue, expansion of the tax base for more equitable taxation and increased revenue, and lower cost of revenue collection. The adoption of Information communication technologies(ICTs) was key to the successful implementation of RARMP (2003 to 2012) with key Business Systems being implemented to replace the previously largely manual systems. The result was that revenue collection significantly increased from Kshs 224 billion ($ 2.24 billion) in 2003 to Kshs 700 billion ($ 7 billion) in 2012.[27]

From 2013 to 2017, the Authority made significant investments in technology adoption in order to sustain its impressive performance. During that period, KRA implemented new generation business systems geared towards further simplification of tax administration processes and attaining a single view of the taxpayer through integration for more coordinated and effective service delivery. The aging core business systems: Simba 2005 and iTMS were replaced by integrated systems (iTax for Domestic Taxes Administration and Integrated Customs Management Systems (iCMS) for Customs and Border Control) built on superior modern platforms, iSupport (KRA Enterprise Resource Planning, ERP) and iCare (KRA Customer Relationship Management) was implemented, a Data Warehouse and Business Intelligence solution was implemented, and a state-of-the-art secondary data center was also implemented. The average Annual Revenue growth rate of 10% with annual cost of revenue collection at below 1.5% during this period is a testament to the Authority has enhanced efficiency in Tax Administration.[28]

KRA began its current cycle of transformation initiative implementation in 2017.  In the years between 2017 and 2020, KRA intended to turn into an Intelligent Tax Administration that effectively makes use of the vast array of digital technologies at its disposal. The KRA’s current transformation projects focus on using technology to change how the Authority interacts with Taxpayers and on adopting data-driven strategies and intelligence-driven processes to consolidate the Authority’s accomplishments and improve its performance moving forward. The current transformation agenda’s catchphrase is “simple at the front, smart at the back,” which aims to convey the Authority’s objectives of streamlining tax procedures and customer service to make it easier for taxpayers to comply with the law while utilizing data and intelligence-driven processes to gain a better understanding of taxpayers and their businesses to enable more rapid and informed decision-making.

Through transforming business operations to be data based, risk based and intelligence driven, KRA aims to drastically reduce the cost of tax collection while significantly growing revenue. KRA’s transformation also progresses the Authority’s evolution from a feared and bureaucratic tax authority to one that fosters voluntary tax compliance through building trust and facilitation.

2.1 Outcomes of adopting digital solutions in revenue administration

Impact of domestic taxes digital solution

Impact of Domestic Taxes Digital solution (iTax) included; simplification of tax processes, enhancing tax compliance, increased Domestic Revenue, enhanced customer experience, reducing cost of compliance & administrative cost to both taxpayers and KRA, reengineering business processes for effectiveness & efficiency, enhanced revenue collection, driver of intelligence based compliance checks and audits, elimination of errors prone with manual data capture and increased accountability in terms of performance management. This simplification of return filing has enhanced voluntary compliance.[29]

 Impact of customs digital solution

Customs digital solution led to realization of enhanced efficiency, faster cargo clearance, seamless integration and data sharing, improved ease of doing business, trade facilitation, enhanced border control and protection, enhanced risk management, visibility/transparency of the cargo clearance process, ease of adoption of internationally accepted best practice and standards.[30]

2.2 Data-driven decision-making for an intelligent tax administration

The central focus of the KRA’s key strategic document – The Seventh Corporate Plan (2018/19 2020/21) is the mobilization of revenue of up to Ksh. 6,105,697 million ($61,056 million) over the 3-year period. A strategic priority to achieve this is through enhanced revenue to be achieved through a data and intelligence-driven approach. The key initiatives with the potential for significant revenue growth are data-driven compliance and Tax Base Expansion programs.[31]

• Implementation of data governance framework

Data is the lifeblood of digital transformation as it enables provision of valuable insights for fact- based decision-making. This necessitated the creation of the Corporate Data office by KRA to co-ordinate and manage corporate data with the requisite level of privacy and security, and to build confidence in the quality of data for improved business decision-making. In the current strategic planning period, the following are the key areas of focus: The Corporate Data Office’s operationalization, the Data Warehouse and Business Intelligence (DWBI) solution must be implemented in full, creation and use of a framework for third-party data including establishing guidelines and requirements that will enable us to access third-party data from important sources, implementing big data capabilities to acquire, store, secure, validate, and use third-party data, and developing the analytical capacity to use third-party data. Addressing the issue of staff members’ poor data literacy and developing and implementing a strategy for cleaning up and maintaining credible Master and Transactional Data.[32]

2.4 Use of data to enhance compliance and expand the tax base

In an effort to transform the organization into a data and intelligence-driven organization, KRA has embarked on using the data within the Authority’s domain to improve compliance and identify new, value-adding taxpayers for recruitment into the tax net. The organization has also developed third-party data sharing and Integration frameworks that have formed the basis for accessing third-party data from external sources (Public and private sector bodies).[33]

• To incorporate the vision 2030 plan

The following tax reforms will be implemented to raise resources to finance government programmes and meet the fiscal deficit targets:[34]

1. Integrated Tax Management System (ITMS). The second phase of the implementation of ITMS will ensure that a wide range of electronic services will be availed including electronic filing and registration, electronic payment, electronic taxpayer accounts, core internal modules covering compliance, audit, debt and refund, incorporation of road transport department’s functions into ITMS and electronic tax register data transmission. The system will enable large and medium taxpayers make online filing of their returns as well as online payments. It will also reduce the frequency of payments made in a year and thereby improve Kenya’s ranking as a preferred investment destination in the World Bank’s Doing Business ranking.[35]
2. Payments of Taxes via Mobile Money. Common Cash Receipting System (CCRS) as a common revenue collection platform in KRA will be enhanced and rolled out to cover all business systems. In addition, CCRS will be fully integrated with Central Bank of Kenya (CBK) and appointed commercial banks for seamless flow of revenue collection information. CCRS will be enhanced to incorporate electronic payment of taxes (e-Pay) and mobile banking.[36]
3. Moreover,the Turnover tax will be revamped to make it more efficient and easy for taxpayers to comply with. A sector-specific taxpayer education programme as well as an expanded scope of electronic payment will be implemented to increase recruitment and registration of taxpayers and revenue collection.[37]
4. Single Customs Territory: Implementation of Single Customs Territory (SCT) and introduction of tax payment at first point of entry requires that Customs Services Department (CSD) develop an optimal revenue sharing agreement formula with partner states. The CSD will, strengthen the computerized systems to reduce cost of doing business and ensure timely disbursement of revenues; separate policy and oversight functions from implementation roles through addressing the non-trade barriers (NTBs) that may inhibit free movement of trade; undertake audit visits to partner states in order to increase governance in revenue management; and also train CSD staff on SCT procedures and structure.[38]
5. A wide Dynamic Risk Management System (DRMS) will be developed, implemented, and integrated with all relevant KRA systems to target resources for higher end activities and facilitate increased efficiency.[39]
6. Implementation of Electronic Cargo Tracking System (ECTS). Multi-vendor ECTS will be completed and rolled out to allow other service providers to come on board. In addition, the system will be integrated with other regional authorities electronic cargo systems to ensure seamless monitoring of cargo throughout the region.[40]
7. Transfer Pricing. To prevent loss of revenue and foreign exchange through transfer pricing the Authority will review the governance structure of the transfer-pricing programme, enhance the transfer pricing risk assessment, implement an alternative dispute resolution strategy, build up the Authority’s third-party information base and sources and strengthen tax information exchange agreements and partnerships.[41]
8. Implement the strategy for taxation of mining sector. The increasing activities in the mining sector are a pointer to the potential of the sector to contribute substantially to the economy and government revenue. This follows the recent discovery of various mineral resources in the country. KRA will put in place the requisite mechanisms and framework to collect increased revenue from this emerging sector.[42]
9. Review of Revenue Acts. Several revenue statutes will be repealed to provide a wider scope for revenue enhancement. In particular, the Value Added Tax Bill will be tabled before Parliament for enactment.[43]
10. County Taxation. KRA will re-organize its regional structure in a manner that will bring services closer to Kenyans and position itself for the expanded role of assisting County Governments in collecting County revenue.[44]
11. Strengthening and revamping tax enforcement mechanisms

KRA will revamp enforcement strategy to address cybercrimes and other information technology related frauds to safeguard revenue and enhance compliance. Key initiatives to be undertaken include:[45]

1. Implementation of automated risk-based audit across all tax heads with automated selection and flagging of compliance risks;
2. Overhaul of the electronic tax register (ETR) system. The focus is on electronic linkage between the ETRs and the ITMS to allow for automated population of taxpayers’ accounts and electronic monitoring of non-compliant taxpayers;
3. Expanding mandatory reporting requirements for business, professionals, barter exchange income, broker transactions, non-employee compensation, real estate transactions, rent and sale of securities;
4. Enhance use of enforcement tools including scanners, boats and ECTS;
5. Use of automated third party information to increase potential for detection of non-registered taxpayers;
6. Increasing the range of transactions for which the personal identification number (PIN) will be required as a means of increasing the potential for detection;
7. Implementation of Phase II of Valuation Database covering exports and other customs regimes to detect under-valuations;
8. Enhance Investigations and Enforcement Department’s capacity to tackle cyber crime and IT related fraud; and
9. Ensure full implementation of the referral guidelines.

3.0 Future of taxation in Kenya

A topic of major interest and significance is the future of taxation in Kenya, given the nation’s lofty economic development objectives and the fast-evolving technology environment. The Kenyan government will need to navigate a complex and quickly changing tax environment in order to improve revenue collection and foster sustainable economic growth. This environment is characterized by emerging trends like digitalization, globalization, and increased public scrutiny of tax practices. This section will examine how the government and policymakers can best adapt to these changes and create a fair, effective, and long-lasting tax system.

3.1 Taxing the informal sector

The Micro-Small Enterprise (MSE) sector in Kenya is large and growing in numbers. The first National Baseline Survey of 1993 identified 910,000 micro and small enterprises (excluding agro-based activity) employing about 2.0 million people. The second National Baseline Survey of 1999 identified 1.3 million enterprises with about 2.4 million people involved. This sector requires treatment other than that provided by refined methods of tax administration and provisions in the revenue code. Small producers are notoriously difficult to tax and subsistence agriculture does not generate large surpluses.[46] An experiment with presumption tax (abolished in 1993 and re-introduced in 1995) was a particularly notable attempt to formalize parts of the informal agricultural sector[47]. Further efforts concentrated on the application of advance tax and tax on rental income. The presumption tax approach and the advance tax approaches, however, fell short of their intended goals due to the informal sector’s lack of visibility and the paucity of empirical research to comprehend data that is important to taxes.

The need to tax the MSE sector is therefore obvious. It arises from the need to encourage compliance; de-institutionalize tax evasion as normal part of doing business; enhance credibility of the tax system and theoretically embed tax equity; encourage the sector to carry its fiscal responsibility, create dis-incentives for the formal sector to sub-divide into smaller business entities below tax thresholds and thus erode the realized tax base and endanger internal balance which goes to exacerbate economic distortions inherent in taxation.[48]

Therefore, the key to achieving this goal will be to streamline the registration process and reduce exposure to registration red tape. Thus, a unique/simplified registration/formality package for the industry is required that takes into consideration regional specificities. By supporting a one-stop-shop approach to registration and tax administration, such a system should support the growth of existing businesses as well as the launch of new ones, in addition to offering the firms legal protection. It should also foster a culture of tax paying among the participants that is free of bureaucracy; introduce good business practices; and encourage participants to pay taxes.

Policy shifts towards internationally acceptable investment incentives. Tax holidays and other “ring-fenced” incentives that exclude local companies erode the tax base, distort investment choices, compromise the equity of the tax system and enhance administrative costs of the tax system. The National Treasury should shift away from tax holidays and other “ring fenced” incentives towards more effective and internationally accepted approaches to stimulating investments such as accelerated depreciation for qualifying manufacturing assets. Similarly, the National Treasury should move towards “automatic triggering mechanisms” rather than discretionary mechanisms that are based on subjective value judgment.[49]

3.2 Enhancing the productivity of the tax system

The tax system has failed to respond favorably to changes in economic activity as well as discretionary tax measures. There is need to prioritize base expansion measures. Such measures include greater use of tax amnesty, lowering registration and tax regulation hurdles; enhance public confidence and trust of citizens in KRA. Measures to seal corruption loopholes would enhance the tax base. These include further simplification of the tax structure and reduction of rates, removal of cumbersome procedures (e.g. import clearance), incentive schemes (remuneration, promotion, pensions, awards and prizes), monitoring (internal and external), professionalizing management and reducing political intervention in day-to-day operations.

Build vertical accountability of the tax system. Since most Kenyans view payment of tax as a punishment rather than a duty, it is important to take into account the “taxpayer’s voice” by building vertical accountability. The KRA should move away from using tax laws to “control and punish” but rather to “facilitate and ensure compliance”. Priority should go towards espousing the participation and taxpayer ownership. Taxpayers need to be more involved in the formulation of tax policy and planning for any changes. This would minimize resistance to reforms, as has been the case in Kenya.[50]

Lower the rate of effective protection for Kenyan products

It is undeniable that customs reform has lessened anti-export sentiment and boosted the growth of unconventional exports. Despite this, the custom laws are intricate and strictly followed, and the tariff structure is distinguished by high and dispersed rates. Another issue is the arbitrary division of products into raw materials, intermediary products, and finished products. In order to achieve lower and uniform tariffs across the board, additional customs reform should aim to lower the tariff rates. Emphasis should be given to streamlining customs laws, and regulations and improving import and export clearance.

3.3 Improve tax collection and administration

Tax collection and administration can be improved through measures such as,

1. Shifting towards an integrated taxpayer registration system where a uniform Tax Identification Number (TIN) would apply regardless of whether a taxpayer is registering for Personal Tax, Corporate Tax or VAT.[51]
2. Simplify the tax code: Since income tax and VAT rates are punitive and lack in-built mechanisms that would enhance self-assessment, there is need to simplify tax laws, forms and procedures.[52]
3. Developing systems that can enhance access to third-party sources of information. KRA still lacks adequate and frequently updated information systems on registered taxpayers.[53]
4. The computerization of taxpayer records is still incomplete. There is a need to develop systems that can access third-party sources of information, such as withholdings, bank transactions, foreign exchange transactions, transactions in securities and large transactions (involving real estate, cars, tax-deductible transactions, customs payments). Use of tax amnesties can prove useful.[54]
5. Enhancing administration through measures such as entrusting sensitive negotiations to special teams; minimizing contacts between taxpayers and tax collectors and reducing the discretionary powers of tax officers; setting up supervisory systems with at least three hierarchical levels to reduce opportunities for collusion; and devising incentive systems that match public and private interests. There is the possibility of relying on banks in collecting taxes.[55]
6. Digital transformation – UNCTAD Trade and Development Report 2019 documented that tax losses range between USD 50 billion to USD 200 billion yearly, with 95% of this value borne by developing countries[56]. These fiscal revenue losses are a major impediment in the achievement of economic growth and development, and call for adaptation of business.

Reduction of revenue losses and attainment of a positive impact on tax administration and revenue collection, can be realized through implementation of digital technologies in operations. These technologies include Big Data, Artificial Intelligence (AI), Machine learning, the Internet of Things (IoT), Mobility and Cloud Computing. Whether employed separately or together, these solutions have the power to increase taxpayer satisfaction and empower employees within tax agencies. For example, UK HM Revenue Customs (HMRC) empowered employees by providing access to modern apps, social media and more flexible working.[57] The strategy has supported use of mobile devices for agile customer support as well as extended webchat hours.

Digital technologies similarly simplify processing and analysis of high volume data, making tax administration and revenue collection efficient. However, a secure and effective ecosystem must first be created if any associated digital risk particularly that of fraud, is to be mitigated.[58]

3.4 Increase in tax compliance level

To progressively increase tax compliance levels, the Government should continuously review the mechanism of detecting, deterring and sanctioning incidences of integrity in tax administration, continuously upscale the use of modern information technology in tax administration services and maintain accurate taxpayer data and regularly issue guidelines to the public to clarify any issues that may arise in the administration of tax laws.[59]

Moreover, the Government should regularly review tax administrative procedures to address gaps and emerging issues, enhance implementation and monitoring of a structured and tailor-made engagement program for stakeholders and strengthen the mechanism of educating different segment of taxpayers on changes to the tax laws and procedures. Furthermore, enhance taxation awareness in the Kenyan education system, pursue a flexible customized approach in dealing with taxpayer’s behavior, put in place a mechanism to penalize non-compliance and incentivize compliance, enhance the visibility of the tax administration across the country and put in place measures that promote sharing of taxpayer information across Government Agencies and County Governments.[60]

Most importantly, it shouldput in place taxpayer risk-based verification programs for detecting and deterring non-compliance, integrate revenue administration systems internally and externally with other third-party systems, enhance collaboration between the tax authority and other government agenciesand enhance the multilateral exchange of information through Automatic Exchange of Information (AEOI) among other arrangements to realize revenue mobilization and foster economic growth.[61]

Conclusion

The Kenya Revenue Authority is aware of the transformative impact that digital transformation has on its efforts to fulfill its duty for tax collection to realize the Sustainable Development Goals (SDGs) and foster economic growth. The organization is eager to attain optimal performance considering the constantly rising income targets established by the Kenya National Treasury, counter the challenges of tax system identified above, shifting taxpayer behavior, and quickening technological advancements in order to succeed in today’s climate. This will be accomplished by employing big data and analytics to develop creative, disruptive, and long-lasting methods for enhancing compliance and boosting revenue. The implementation of the appropriate technical architecture and capabilities, as well as a clear plan for how to use data and analytics to compete, will serve as the foundation for these competences. Data and analytics have the potential to transform tax administrations in various ways, such as the following, the capacity to locate and exploit new sources of income, with a quicker response to market dynamics, predictive analytics would enable more exact targeting of taxpayers and the impact of various taxing regimes and Tax administrations will be able to gauge effects and estimate potential outcomes in an effort to boost compliance.

Recommendation

1. There should be a thorough and vigorous stakeholder engagement to guarantee that digital solutions are in line with business needs and client preferences. It is also important to note that tax administrations should value taxpayers as important stakeholders. For example, tax administrations could apply design-thinking techniques to identify issues with taxpayers and provide solutions. Design thinking provides a solution-based approach for solving complex business problems, and meeting customer’s needs and desires in product and service delivery in a technologically feasible and strategically viable way[62] (Brown, 2019). The tax administrations will be able to efficiently address complex problems and challenges that taxpayers experience by utilizing design thinking.
2. Technology is developing quickly. Tax administrations must remain progressive and not centralized in order to remain modern. To accommodate changing taxpayer needs, digital solutions should be flexible when they are implemented.

Technology in tax administration has a lot of potential for improving compliance. The ideal situation would be for tax returns to be pre-populated with data that has been carefully mined. It is clear that technology has the power to alter taxpayer behavior for the better; automation must put the needs of the consumer first. By altering how customers interact with a digitally based revenue system, streamlining operations, and better utilizing data and intelligence to better understand customers and increase tax compliance levels, transformation will simplify how services are offered. The revenue administration processes need to be continuously reviewed given the modern businesses expanding complexity and breadth. This is vital to meet the evolving requirements and expectations of the 21st-century taxpayer as well as to secure adequate flows of exchequer revenues.

The writer is a student at the University of Nairobi, Faculty of Law as well as a Research Assistant at Morara Omoke Advocates. His interests include financial & tax regulation, taxation law, finance law as well as Policy and decision-making. He can be reached through nyabiraaustine@gmail.com   

[1] Muraya Lucy Njoki (2013) Taxation and Revenue Stability in Kenya. (Online) Available at http://erepository.uonbi.ac.ke/bitstream/handle/11295/63071/Muraya_Taxation%20and%20revenue%20stability%20in%20Kenya.pdf?sequence=3 (Accessed on March 15, 2023)

[2] Eliud Moyi & Erick Ronge (December 2006), Taxation and Tax Modernization in Kenya: A Diagnosis of Performance & option for further Reform. Available Online at https://www.africaportal.org/documents/12008/Tax-Revenue-Performance-in-Kenya1.pdf (Accessed on March 15, 2023)

[3] Article 209(1) of the Constitution of Kenya 2010

[4] Article 209(2) of the Constitution of Kenya 2010

[5] Article 210(1) of the Constitution of Kenya 2010

[6] Article 201(b) of the Constitution of Kenya 2010

[7] Ibid

[8] Section 2, Public Finance Management Act, 2012

[9] Income Tax Act, Cap 470

[10] Value Added Tax Act, 2013

[11] Excise Duty Act, 2015

[12] Tax Procedures Act, 2015

[13] East African Community Customs Management Act, 2004

[14] Miscellaneous Fees and Levies Act, 2016

[15] Miscellaneous Fees and Levies Act, 2013

[16] Kenya Revenue Authority Act, (Cap. 469)

[17] National Tax Policy (June 2022) Available online at https://www.treasury.go.ke/wp-content/uploads/2022/07/DRAFT-NATIONAL-TAX-POLICY-16.06.-2022-.pdf (Accessed on March 15, 2023)

[18] https://www.imf.org/external/pubs/ft/issues/issues27/ (Accessed on March 15, 2023)

[19] National Tax Policy (June 2022) Page 18

[20] Ibid, Page 19

[21] National Tax Policy (June 2022) page 20

[22] Ibid

[23] Ibid

[24] Nada O. Eissa and William Jack (October 2009): Tax Reform in Kenya: Policy and Administrative Issues. (Online). Available at https://policydialogue.org/files/publications/papers/ch6_Nada_O_Eissa__William_Jack.pdf (Accessed on March 15, 2023)

[25] OECD (2018), Going Digital in a Multilateral World. [Online]. Available at: https://one.oecd.org/document/DSTI/CDEP/GD(2018)2/en/pdf (Accessed on March 15, 2023)

[26] Supra note 17

[27] Gladys Kitony (June 2019): Unlocking Revenue Administration Potential: Case of the Kenya Revenue Authority (KRA) Digital Transformation Journey (Online). Available at https://www.oecd.org/tax/forum-on-tax-administration/publications-and-products/Kenya-Digital-Transformation-case-study.pdf (Accessed on March 16, 2023).

[28] Gladys Kitony (June 2019): Unlocking Revenue Administration Potential: Case of the Kenya Revenue Authority (KRA) Digital Transformation Journey(Page 3)

[29] Gladys Kitony (June 2019): Unlocking Revenue Administration Potential: Case of the Kenya Revenue Authority (KRA) Digital Transformation Journey (Page 4)

[30] Ibid, Page 5

[31] Ibid, Page 5

[32] Ibid

[33] Ibid, Page 6

[34] Kenya Vision 2030 Tax Reforms. (Online) Available at https://vision2030.go.ke/project/tax-reforms/ (Accessed on March 16, 2023)

[35] Vision 2030, Tax Reform 1

[36] Vision 2030, Tax Reform 2

[37] Vision 2030, Tax Reform 3

[38] Vision 2030, Tax Reform 6

[39] Vision 2030, Tax Reform 7

[40] Vision 2030, Tax Reform 8

[41] Vision 2030, Tax Reform 9

[42] Vision 2030, Tax Reform 10

[43] Vision 2030, Tax Reform 11

[44] Vision 2030, Tax Reform 12

[45] Vision 2030, Tax Reform 13

[46] Eliud Moyi & Erick Ronge (December 2006), Taxation and Tax Modernization in Kenya: A Diagnosis of Performance & option for further Reform. Available Online at https://www.africaportal.org/documents/12008/Tax-Revenue-Performance-in-Kenya1.pdf (Accessed on March 16, 2023)

[47] Cheeseman N. and R. Griffiths. 2005. “Increasing Tax Revenue in Sub-Saharan Africa: The Case of Kenya”, Oxford Council on Good Governance, Economy Analysis No 6, Oxford United Kingdom

[48] Eliud Moyi & Erick Ronge (December 2006), Taxation and Tax Modernization in Kenya: A Diagnosis of Performance & option for further Reform.

[49] Ibid, Page 36

[50] Ibid, Page 37

[51] Ibid

[52] Ibid

[53] Ibid

[54] Ibid

[55] Ibid

[56] UNCTAD Trade and Development Report 2019

[57] Kendi Nderitu (April 2020) Digital Transformation: Providing Secure & Effective Ecosystem. (Online). Available at https://www.kesra.ac.ke/the-role-of-technology-in-expanding-the-tax-base-taxprism-issue2/#:~:text=Digital%20technologies%20similarly%20simplify%20processing,fraud%2C%20is%20to%20be%20mitigated. (Accessed on March 16, 2023)

[58] Ibid

[59] National Tax Policy (2022), page 32

[60] Ibid

[61] Ibid

[62] Brown, T. (2019). Design Thinking. [online] Harvard Business Review. Available at:

https://hbr.org/2008/06/design-thinking (Accessed on March 16, 2023)