Tax collections from goods and services purchased locally have surpassed the goal the Treasury set for the first time in seven years on the requirement that all businesses issue electronic receipts.
The Kenya Revenue Authority (KRA) received Sh313.37 billion in domestic value-added tax (VAT) for the year ended June 2024, Treasury data shows, making it the only tax vote to have overshot the target in the review period.
The Sh5.54 billion over-performance against a target of Sh307.82 billion was the first since the financial year ended in June 2017 when the domestic VAT receipts overshot the Sh194.23 billion target by Sh49 million.
MPs amended Section 23 of the Tax Procedures Act through the Finance Act 2023 requiring all businesses to issue electronic invoices starting September 1, 2023.
They further amended Section 16 of the Income Tax Act providing that effective January 1, 2024, only invoices generated through the electronic Tax Invoice Management System (eTIMS) would be used in determining deductible expenses in computing corporate income tax.
Following an outcry from businesses, the latter deadline was extended to March, meaning all businesses to onboard eTIMs from April 1, with the KRA required to monitor transactions and have visibility of claims of value-added tax refunds by companies.
The collections were also partly boosted by higher VAT rates on some commodities, including fuel where the deductions doubled to 16 percent from the previous eight percent.
This was part of the wider IMF-backed aimed at restricting zero-rating for VAT purposes to export of goods and services while limiting exemptions to goods supplied in raw form.
The KRA views the rollout of the eTIMS, whose implementation is now in question after the Courts ruled the Finance Act unconstitutional, as a measure that will finally make VAT a top revenue generator.
Deductions from individual and corporate earnings remain the biggest tax revenue stream for the KRA.
“As it is now if there’s one tax head that every single person is paying is VAT. Even to a small child on products which are not exempt [VAT is applicable]. Everybody is incurring VAT,” Commissioner for Domestic Taxes Department Rispah Simiyu said in an earlier sensitisation forum on eTIMS.
“Why then shouldn’t it be the tax head that performs the best? That remains a challenge to us…and it is a challenge that we are taking graciously.”
Total VAT collections, including receipts from imports, amounted to Sh645.49 billion, a 17.27 percent growth over Sh550.44 billion a year earlier.
Income tax—taxes on payroll and profit by corporations and enterprises—remained by far the biggest generator of taxes, crossing the Sh1 trillion mark for the first time to Sh1.04 trillion in the year ended June 2024 from Sh941.58 billion the year before.
The VAT on domestic sales overshot the target despite growing at a slower pace of 14.9 percent compared with the VAT on imports which jumped by a fifth (19.59 percent) to Sh332.12 billion but missed the target by Sh14.84 billion.
The transition from the old system to the ETIMS, which was initially set to kick off in August 2022, initially encountered headwinds because of supply hitches of the upgraded gadgets, prompting Times Tower to extend compliance.
The eTIMS registers are linked to KRA’s systems through the internet, allowing the KRA to scrutinise all deals in the trader’s point of sale in real-time on near real-time.
The system is an upgrade from the manual registers that are used to store data on sales for scrutiny by the taxman after 30 days, creating a loophole for manipulation and evasion of taxes.
Traders who fail to comply with the eTIMS are subjected to a stiffer fine of paying two times the value of tax due up from the previous penalty of Sh100,000.
VAT has become a top target for the Ruto administration with the Treasury arguing that the policy on zero-rating and exemption in the VAT tax system has over the years eroded government revenue, with collections underperforming potential by nearly 40 percent.
The Treasury estimated that tax concessions on domestic VAT dropped to Sh211.94 billion in 2021 from Sh234.38 billion in 2020.
Domestic VAT, however, accounted for 82.29 percent of the Sh259.51 billion revenue forgone by the KRA in 2021.
The Treasury and the KRA chiefs have in recent years maintained the tax concessions have failed to benefit the economy through, increased growth in investments, employment opportunities, and affordable prices for consumers.
They have, as a result, been clawing back some of the preferential rates of tax, investment deductions, tax reliefs, zero-rating for VAT purposes, and exemptions as part of the structural benchmarks with the IMF.
