Effects of Rental Tax Reforms on Revenue Collection in Kenya


Academic Paper, 2019

22 Pages, Grade: 100


Excerpt

TABLE OF CONTENTS

ABSTRACT

CHAPTER ONE
INTRODUCTION
1.1. Chapter Overview
1.2. Background of the Study
1.2.1. Tax Reforms
1.2.1.1. Administrative Tax Reforms in Kenya
1.2.1.2. Policy Tax Reforms in Kenya
1.2.1.3. Technological Tax Reforms
1.2.1.4. Tax Reforms on Rental Income
1.3. Statement of the Problem
1.4. Objectives
1.4.1. General Objective
1.4.2. Specific Objectives
1.5. Research Questions
1.6. Justification of the Study
1.7. Scope of the Study

CHAPTER TWO
LITERATURE REVIEW
2.1. Introduction
2.2. Theoretical Literature Review
2.2.1. Technological Determinism Theory
2.2.2. Dynamic Theory of Public Spending, Taxation, and Debt
2.3. Empirical Literature Review
2.3.1. Monthly Rental Tax Income
2.3.2. Withholding Income
2.3.3. Tax Amnesties
2.3.4. Block Management System
2.4. Research Gaps
2.5. Conceptual Framework

REFERENCES

ABSTRACT

Taxes play a crucial role in the development of a nation. In Kenya, tax revenues have always failed to reach the anticipated collection targets due to many factors. The taxman has had to develop policies that aim at reforming tax management and achieve the set targets In this regard the researcher seeks to study the effects of rental tax reforms on revenue collection by the Kenya Revenue Collection agency as the main objective. The specific objectives of this study are; to identify the effect of monthly rental income on rental revenue collection, to determine the effects of withholding rental income on rental revenue collection, to find out the effect of tax amnesty on rental revenue collection and to investigate the effect of block management systems sector on rental revenue collection The study is guided by the dynamic theory of public spending, taxation, and debt and the technological advancement theory. An empirical review is also undertaken to link the independent variables to revenue collection and the research gaps arising. The study shall adopt a descriptive research design and a case of KRA shall be carried out. The target population is 500 employees and a sample size of 81 has been obtained for this matter. Questionnaires shall be used to gather primary data whereas secondary data shall be obtained from KRA, the Ministry of Finance and other relevant entities. The data shall then be analysed using IBM SPSS version 20.0, classified, tabulated and summarized using figures, summary statistics of the mean, and standard deviation percentages and frequency distribution tables. A detailed explanation of the data shall also accompany the presentation .

CHAPTER ONE

INTRODUCTION

1.1. Chapter Overview

This chapter contains an outline of the background information on tax reforms and revenue collection. The chapter presents the statement of the problem as well as the general and specific objectives of this study. Chapter one further presents the research questions. The chapter justifies the study. The scope of the study is also discussed in this chapter.

1.2. Background of the Study

Murphy and Higgins (2016) define tax as a compulsory contribution made to a government by residents of a country or companies operating in a specific country. According to David & Norbert (2017), governments raise revenue through taxes to finance public expenditure. Taxes are used to fund education, infrastructure projects and pay salaries to civil servants. Governments use taxation as a tool to combat income inequalities by taxing high net worth individuals and companies and using the money to fund other government programs. Taxes are also used as a fiscal policy tool. Fiscal policy tools aim at controlling how much money the government or individuals should spend in specific areas of the economy. (David & Norbert, 2017).

In Kenya, the function of revenue collection is done by the Kenya Revenue Authority (KRA) which was established in 1995 by an Act of Parliament, Chapter 469 of the laws of Kenya. KRA collects six types of taxes. These types of taxes are; Income Tax, Rental Income Tax, Value Added Tax (VAT), Excise Duty and Capital Gains Tax. Income tax is charged on income from employment, professional services, and investment income among others, and it is based on tax brackets that are regularly reviewed. In Kenya, rental income is taxed at a rate of 10% on both commercial and residential buildings. VAT is charged on taxable goods and services in Kenya at a rate of 16% whereas excise duty is charged on goods manufactured in Kenya or imported into the country and such goods are specified in the first schedule to the Excise Duty Act of 2015. Capital gains tax is charged on sale of capital assets whereas agency revenue is collected as Stamp Duty and Betting and Pool Tax (KRA, 2019).

An analysis of Kenya’s budget reveals that taxation was the single largest source of government revenue. Tax revenue formed 80.4% of government budget between the years 1995 to 2004. The budget deficit of 19.6% was bridged by non-tax revenue; loans and bonds, and grants from foreign entities. Non tax revenue accounted to 15.1% of the nation’s budget. Subsequently, foreign grants amounted to 4.5% of the total budget (Kanyi, 2014).The analysis further shows that KRA has failed to meet its collection targets. For instance Ksh 800 billion was collected against a set target of Ksh 973.5 billion in the year 2013/2014 to fund a budget of Ksh 1.6 trillion. The trend has continued to be the same until year 2018/2019 where the amounts collected are far much less than the budget – forcing the government to borrow (Chilibasi, 2014).

The imbalance between government expenditure and revenue generated may result to chronic fiscal deficits. Often, the government has resorted to floating government bonds in the local market, euro bonds and borrowing from foreign governments and entities to finance the deficit. Overreliance on foreign aid and printing money may not be viable solutions to debt sustainability. It is therefore desirable that the government adopts and enacts measures or reforms and ensures there are stable revenue streams to finance its expenditure. The process of changing the way taxes are collected or managed is called tax reforms. Tax reforms may be administrative, policy reforms or technological reforms that are aimed at improving revenue collections in the country (Gituku, 2011).

1.2.1. Tax Reforms

1.2.1.1. Administrative Tax Reforms in Kenya

Tax administration is the framework that supports daily collections and management vof revenue. The reforms undertaken have aimed at making the tax system easier to use by both the taxpayer and the administrator. This initiative aims at reducing the administration costs, enhance tax compliance and track defaulters on a real time basis (Gituku, 2011).

In the year 2005/2007, Kenya Revenue Authority established the Revenue Administration Reform and Modernization Program (RARMP). The objective of RARMP was to transform the tax agency into a modern client focused entity. The program was based on a strong administrative structure reinforced by the Program Management and Business Analysis Office (PMBO) that was created the same year. PMBO revamped the system by creating the Domestic Taxes Department that is structured along returns, payments, audit and reinforcement of tax initiatives. The Authority also established the intelligence and investigation functions to help achieve its objectives. In spite of the shortcomings that affected the RARMP, KRA was able to transform itself into an ultra-modern, fully integrated and client-focused organization (KRA, 2012).

1.2.1.2. Policy Tax Reforms in Kenya

Governments need to meet their revenue targets to fund social obligations. With declining external assistance in budgetary finance, most governments have had to come up with policy measures to combat the perennial fiscal crisis it they face. These policy tax reform measures have been developed to change the way taxes are collected or managed. Tax reforms were introduced in Kenya in 1986 through a program called Tax Modernization Program (TMP), nine years before the formation of KRA. The TMP program’s first step was to increase tax reliefs to low income earners, lower marginal rates and widen the tax brackets for the country (Munene & Nduruhu, 2016).

The Tax Modernization Program brought about the introduction of VAT in 1990 to replace, the low revenue potential, sales tax. Initially, VAT was charged at a rate of 105% for over 50 items. This rate has significantly reduced to 15% in 1997 to the current 16% except on zero rated and exempt items (Gituku, 2011). KRA has undertaken policy tax reforms in two distinct area; domestic and customs. In order to enhance efficiency in taxation, KRA introduced the Domestic Taxes Department (DTD). The DTD was a merger of the Income Tax and VAT and now manages Domestic Excise Customs and Excise departments through the Large Taxpayer Office (LTO). The customs policy reforms were undertaken to modernize administration of the customs department based on internationally accepted standards (KRA, 2012).

An analysis of customs taxes reveals many changes during the reform period. Measures were taken to increase exports, restrict exemptions on import dusty and strengthen the administration of the customs unit. In the period from 1987 to 1988, the tariff rated dropped from to 25% from 170% whereas the tax bands were lowered to 5 from 24. The result was a drop in the simple average rate from a huge 40% to 16%. In the period after 1991, the government abolished discretionary exemptions and eliminated exemptions on agricultural imports in form of aid during national disasters (KIPPRA, 2005).

1.2.1.3. Technological Tax Reforms

The Electronic Tax Register (ETR) was introduced in July 2015 to help in compliance issues with VAT. KRA also launched iTax, a system that provides a web based Integrated Tax Management System for clients, Taxpayers can now file tax returns online via iTax, they can register and be issued with Personal Identification Numbers (PIN), they can access Tax Compliance Certificates and get more information on tax issues through the portal (Kanyi, 2014).

In 2005, KRA launched the Simba System, Cargo Management Information System (CAMIS), a 24-hour Document Processing Centre (DPC) and the Customs Oil Stocks Information System (COSIS). The Authority introduced the ORBUS, an electronic document exchange platform that has greatly reduced clearance time for cargo. KRA also introduced the use of Electronic Cargo Tracking System (ECTS) which helps track cargo in real time (Kanyi, 2014).

1.2.1.4. Tax Reforms on Rental Income

According to Tax Kenya (2017) there are two types of rental income in Kenya; commercial rental income and residential rental income. Commercial rental income attracts a tax rate of 16% VAT whereas residential premises enjoy a 10% flat rate for resident landlords on rent above Ksh.144,000 per to Ksh.10 million per year. For income below Ksh.144,000 and above Ksh.10 million per year, the landlords are required to file this as an income among other incomes during the annual filing of income tax. However, nonresident landlords pay a 30% rate through their appointed agents. Landlords are not allowed any expenses on building when computing for tax payable. The period for taxation is considered to be one month and tax is payable on or before 20th of the preceding month. Late filing of the returns attracts a 5% penalty or Ksh.2,000 or whichever is higher and a 1% interest for the following months it remains unpaid until the tax due is paid (Tax Kenya, 2017).

According to Kubania (2016), during the presentation of the 2015/2016 national budget, the then Cabinet Secretary, Henry Rotich introduced a 10% tax on rental income on residential buildings. This policy came into effect in the following year of 2016. Subsequently, the taxman declared a tax amnesty until end of June 2016 when all landlords were required to disclose rental taxes due since January the same year. The landlords who had file and paid all taxes for the year by the deadline were allowed a waiver on all taxes and interest accrued for the years since 2013 to previous years. KRA adopted stiff measures to ensure that it collected Ksh.3 billion, which was less than the Ksh.10 billion target for that financial year (Kubania, 2016).

In 2016, the taxman sent compliance notices to over 60,000 landlords across the country. KRA employed an additional 300 personnel to scout for new landlords, away from its records, in Nairobi alone. Through the block management system, KRA is seeking to gather information on the physical presence of the buildings, the rent payable and sub-units that have been let out in such buildings. The budget statement also required all corporate tenants; public institutions and private companies to withhold a 10% rental tax on behalf of the KRA. Amongst the stringent measures that KRA has put in place to enhance compliance on rental tax payments include seizing and auctioning of the property in question and issue agency notices via bank accounts to recover unpaid tax from landlord’s accounts (Kubania, 2016).

1.3. Statement of the Problem

The Finance Act, 2015 had an impact on several sectors of the Kenyan economy. For instance, this act brought in the residential rental income tax through section 6A of the Income Tax Act, Cap 470. This amongst other tax reforms has aimed at increasing revenue collection in Kenya (Onchwari, 2018). In an article by Kabale (2019) in the Daily Nation newspaper carried the title ‘Crisis looms as donor health fund shrinks,’ it is evident that Kenya’s tax revenues are not sufficient enough to fund the budget This article has brought concerns over the budget deficits and Kenya’s inability to cut overreliance on donor funding as well as external borrowing. Kenya’s budget for year 2019/2020 is Ksh 3.1 trillion. Out of this figure, 61% will be used to pay debts. The debts owed by the government currently stand at a staggering Ksh.5 trillion. This figure is too high and it leaves the government with less revenue to spend on recurrent expenditure and development initiatives (Igadwah, 2019).

Tax is the main source of revenue for the government of Kenya hence tax policy debates have become crucial concerning how the tax revenue is raised. Kenya’s fiscal deficit can be attributed to increased government expenditure and failure by the Kenya Revenue Authority to meet its revenue collection targets. The government has had to make tough financing decisions which include borrowing from foreign governments, floating Euro bonds and as well as internal borrowing by issue of infrastructure bonds. (Gituku, 2011).

In spite of the various tax reforms that have been undertaken by the country, KRA has failed to meet the fiscal deficit through tax revenue collections. There are deeper concerns since the challenges faced by the National Treasury and KRA in revenue collection 20 years ago are still the same today despite the many reforms that have been undertaken. Reforms have been established to combat tax evasion and avoidance and corruption in taxation. Technological advancements have also been made in revenue collection and yet the taxman has failed to meet his targets. It is common word on the streets that Kenyans are over-taxed yet budget deficits still do exist which questions the productivity of these tax reforms and their effect on tax revenue collection. It is common ground amongst Kenyan stakeholders that the introduction of rental tax reforms will have an impact on revenue collection in Kenya. This study, therefore, seeks to answer the research questions by determining the effects of rental tax reforms on revenue collection in Kenya.

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Details

Title
Effects of Rental Tax Reforms on Revenue Collection in Kenya
College
Kenyatta University
Grade
100
Author
Year
2019
Pages
22
Catalog Number
V536251
ISBN (eBook)
9783346128928
ISBN (Book)
9783346128935
Language
English
Tags
Tax, Tax Policies, Rental Tax, Block Management System, Kenya Revenue Authority
Quote paper
Dennis Nangabo (Author), 2019, Effects of Rental Tax Reforms on Revenue Collection in Kenya, Munich, GRIN Verlag, https://www.grin.com/document/536251

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