Revenue Administration and Tax Policy

Revenue Administration and Tax Policy

Syllabus tag: KASNEB CPA | Advanced Level | CA35S2 Advanced Public Financial Management

1. Revenue sources in Kenya

National government revenue:

• Tax revenue: income tax (PAYE, corporate tax, capital gains), VAT, excise duty, customs duty, and stamp duty — collected by the Kenya Revenue Authority (KRA)
• Non-tax revenue: levies, fees, licences, and fines collected by MDAs and deposited into the Consolidated Fund

County government revenue:

• Equitable share from national revenue (the largest source — about 15% of national revenue)
• Conditional grants from the national government
• Own-source revenue: property rates, business licences, market fees, parking charges, entertainment taxes

2. The Kenya Revenue Authority (KRA)

The KRA was established in 1995 under the Kenya Revenue Authority Act to collect and administer tax on behalf of the national government. KRA departments: Domestic Taxes Department (income tax, VAT, excise), Customs and Border Control (customs duty, excise on imports), and Technical departments (intelligence, investigations, audit).

KRA's mandate: optimise domestic revenue mobilisation while facilitating legitimate trade and business.

3. Tax policy considerations

Tax design principles (the canons of taxation — Adam Smith): equity (fairness — horizontal and vertical); certainty (taxpayers should know what, when, and how to pay); convenience (easy to pay); economy (cost of collection should be low relative to revenue raised). Modern additions: efficiency (minimise distortions to economic decisions) and simplicity.

Tax buoyancy: measures whether tax revenue grows at least as fast as GDP. Buoyancy > 1 means revenue is growing faster than GDP. Desirable for development financing without raising rates.

Tax expenditures: foregone revenue from exemptions, zero-rating, and preferential rates. Kenya is required under the PFM Act to disclose tax expenditures in the budget.

4. Revenue forecasting

Revenue forecasts underpin the budget. Methods: macro-economic approach (link tax revenue to GDP growth using historical tax-to-GDP ratios); bottom-up approach (forecast each tax head based on economic activity and legislative changes). The National Treasury publishes the Budget Policy Statement containing revenue forecasts for the MTEF period.

5. Own-source revenue for counties

Counties underperform on own-source revenue due to: limited revenue base; capacity constraints; political interference; manual systems prone to leakage. Reforms include: automation of revenue collection (point-of-sale systems, M-Pesa integration), strengthening county revenue departments, and updating outdated fee schedules.

6. Fiscal decentralisation

Kenya's devolution (2013) transferred significant functions and resources to 47 county governments. Effective fiscal decentralisation requires: adequate funding (equitable share + own-source); expenditure assignments matching devolved functions; accountability mechanisms at county level; capacity to manage public finances.