In Kenya, the need to improve tax compliance has been necessitated by the need to increase government revenue, bridge the widening budget deficit and generate adequate revenues to pay debts. While as, taxpayers are generally aware of their obligations and need to make their contribution towards raising the government revenue, there is a growing consensus on focus to role of the state capacity in improving the efficiency of tax administration in a way that contribute to a more accountable and responsive state.
According to Olaoye, Ayeni-Agbaje, and Alaran-Ajewole (2017 p.133), defines tax compliance “as the willingness of taxpayers to act in accordance with tax laws, declare the correct and true incomes in each year and pay the right amount of taxes on time”. Tax compliance can either be voluntary or enforced by tax authorities. The Kenya Revenue Authority (KRA) is the main income tax body with the powers of collecting revenue on behalf of the government of Kenya. In the past it used enforcement as the main driving tool for tax compliance. This however had negative consequences on KRA’s image as they relied on unduly punitive methods of securing compliance. In the recent times, KRA has made significant strides in seeking to amend the relationship with the taxpayers by deployment of avenues that encourage better engagement and facilitation of voluntary tax compliance.
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According to the Khalif (2017), reported that despite KRA’s media campaigns for taxpayers to file returns, only 2.4 million people heeded the call to file their returns. This was an indication of very low compliance because despite KRA’s database having 8.1 million registered number of taxpayers, only 2.9 million were active. Further, Khalif (2017), included a report on a study on tax evasion and tax avoidance in developing countries published by German Technical Cooperation (GTZ) in 2010 that gave reasons for low compliance. These included low tax morale, high compliance costs and weak enforcement of tax laws. On the low morale (Khalif, 2017) expounds that firstly, it was the quality of public services provided affects willingness to pay taxes. Secondly, the tax rates and the overall structure of the tax system affect the disposition to evade or avoid tax. Thirdly, low level of accountability and transparency in the use of public resources created a distrust of the tax system and government leading to the willingness to evade taxes. Fourthly, misuse of tax revenue by officials entrusted with management affects tax morale thus leading to evasion.
Background to the Study
Tax is a principle source of government revenue. The challenge of tax evasion, tax avoidance and siphoning of funds by corrupt government officials has therefore had a direct impact on government administrative and development agenda. According to Ochieng’ (2015), Kenya is estimated to loss Kshs. 639 Billion annually in tax evasion by multinational corporation, significantly hampering economic growth. Further, ‘Tax and Development: Aid Modalities for Strengthening Tax Systems’ (2013), stated that developing countries need to establish tax systems that are not only effective in mobilizing resources, but also distribute the tax burden fairly and minimize tax distortions that may deter productive investment and impair growth. This two-way interaction between taxation and governance suggests that there can be a virtuous circle in which tax reforms lead to improvements in governance which, in turn, facilitate revenue mobilization.
Effective governance ensures equal participation from all sectors. The United Nations Economic and Social Commissions for Asia and Pacific (ESCAP) list 8 major characteristics of good governance. Good governance is said to be participatory, consensus oriented, accountable, transparent, responsive, effective and efficient, equitable and inclusive and follows the rule of law. The Constitution of Kenya gives prominence to national values and principles of governance.
Article 10 (2) of the Constitution provides the national values and principles of governance as follows: 1) patriotism, national unity, sharing and devolution of power, the rule of law, democracy and participation of the people; 2) human dignity, equity, social justice, inclusiveness, equality, human rights, nondiscrimination and protection of the marginalized; 3) good governance, integrity, transparency and accountability; 4) sustainable development (KNCHR, 2016).
However, the government is still far from achieving this objectives due challenges such as rampant corruptions scandals allegations witnessed involving senior public officials and misuse of public fund among others.
Trust is a critical aspect of contractual fiscal exchange relationship between the government and its citizens. Therefore, the call to increased transparency in terms of the level of information provided cannot be ignored. This is because tax payers often seek to evaluate their benefits relative to the tax burden. In his book The Wealth of the Nations, Smith (1776) lays down four principles or cannons of taxation namely: a person’s ability to pay; certainty; convenience and should be administratively efficiently without causing economic distortion. Eragbhe and Izedonmi (2012), stresses that the rationale for the cannons of tax is to ensure voluntary compliance and timely filling of returns on the part of the taxpayer. In addition, transparency and accountability of tax revenue positively impacts the number of taxpayers willing to comply with the tax laws and by extension the tax revenue collection by the government.
Government Revenue
Government revenue refers to all income the government gets from taxes, custom duties, revenue from state-owned corporations, capital revenue and foreign grants or aid. Taxation is the main source of Kenya’s government revenue. According to ICPAK (2016), a study focused on Kenya’s annual revenue performance between the financial years 2010/2011 to 2014/2015, findings showed that Kenya’s tax contribution to the revenue portfolio averaged 96% while non-tax revenue accounted for 4%. It was also observed that the country’s total revenue significantly increased from Kshs. 651 billion in 2010/2011 to Kshs. 1.1 trillion in 2014/2015 which represented a 44% increase in revenue in 5 years. In addition, ICPAK (2016) showed that the growth is largely attributed to increase in income tax, which increased from Kshs. 272 billion in 2010/ 2011 to Kshs. 542 billion in 2015. Further analysis showed that Kenya’s revenue portfolio is heavily dependent on direct taxes with Pay As You Earn (PAYE) contributing a larger proportion to overall tax revenue (ICPAK 2016).
Tax System in Kenya
Kenya has a broad taxation system that comprises of direct taxes and indirect taxes. The main direct taxes are namely: individual income and corporate taxes, while the main indirect taxes are: Value Added Tax (VAT); Excise tax and Customs duties. Taxation is one of the ways through which redistribution of income can be achieved depending on the design of the tax system.
Personal income taxes are levies in Kenya as legislated under the Income Tax Act. This is direct tax that is imposed on individuals income derived from employment, dividends, and business among others. According to Kinuthia (2017), following the implementation of Finance Act 2017, new tax rates for PAYE came into effect from January 1st 2018. It is expected that the expansion of the tax bands coupled with the increase in personal relief will have an effect on lowering the tax burden for employees.
The rate of Corporate Income Tax (CIT) for resident companies, including subsidiary companies of foreign parent companies, is 30 % and the rate for branches of foreign companies is 37.5%. According to PWC (2018), there are special rates for certain resident and non-resident companies such as Export Processing Zone (EPZ) enterprises at Zero rate for the first ten tears and 25% for next ten years.
According to Wanjala (2006), income taxes can play a major role in redistribution of income. The widening of tax brackets, reduction of top marginal rates and increasing the levels of personal relief over time have played a big role in making the income tax more progressive and therefore more equitable. Value Added Tax (VAT) is charged by businesses at the point of sale of goods and services in Kenya. VAT is considered to be highly regressive. However, the use of exemptions and zero rating of specific commodities has made the system more progressive and thus more equitable (Wanjala, 2016). Excise Duty is tax levied on the importation or local manufacture of certain products and supply of excisable services. It is levied at high rates commodities that are considered to be luxuries like alcoholic drinks and chocolates. Wanjala (2006) argues that there is a clear policy direction of increasing reliance towards indirect taxes (mainly consumption taxes) with VAT being seen as the tax for the future.
Government Accountability
According to Finel and Lord (1999 p.316), government accountability is defined as “government transparency comprising of the legal, political, and institutional structures that make information about the internal characteristics of a government and society available to actors both inside and outside the domestic political system”. Everest-Philip and Sanfall (2009), (cited in Eragbhe & Izedonmi, 2012) argues that the public perception of government accountability can influence tax morale and tacitly, voluntary compliance. Therefore, how the government goes about in fulling these obligations should matter to the taxpayers because they provide the finance for its sustenance.
According to Mberere (2011), argues that while the duty of collecting revenue or taxes belongs to the government. This duty gives the government the obligation to account for its activities, accept its responsibility, and disclose the results in a transparent manner. In other words, the taxpayers have the right to know how the money collected in terms of taxes is being used and demand for services from the government. Further, taxpayers who believe that their interests are represented in a democracy have been found to be willing to pay taxes (Mberere, 2011). Taxation can be used as an effective bargaining tool between states and citizens in strengthening state capacity and democracy. The bargain might involve governments’ ability to raise substantial amounts of their revenue through taxation while the taxpayers pressure the governments to be accountable for the use of their money. OECD (2008) stated that taxation systems can contribute significantly to shaping accountability relationships and strengthening state capacities. However, states that are reliant on revenue from foreign aid and natural resources tend to have little incentive to be accountable, responsive or efficient. Limited dependence on taxes has shown to lead to bad governance outcomes.
Tax Compliance
According to Singh (2003) tax compliance is a person’s act of filling the Income Tax form, declaring all taxable income accurately and disbursing all payable taxes within the stipulated period without having to wait for follow-up actions from authority. Revenue raised from taxation is crucial to supporting the provision of services, the maintenance of infrastructure, employment of civil servants and running of various government functions. Compliance is therefore, a key concern for governments due to budgetary deficits as a result of tax evasion and low compliance. According to Isbell (2017), low tax compliance weakens the state’s ability to invest and develop. Ali, Fjeldstad and Sjursen (2013) have found that not understanding how taxes are used is negatively correlated with tax compliance. Isbell (2017), points out that while most Africans found taxes to be necessary for development, many citizens mistrusted the tax officials and found them to be corrupt. This appears to contribute to attitudes that could affect compliance. Other correlations between positive attitudes towards tax compliance, is their role as taxpayer to have meaningful say in politics. In a study by Musau (2015), the findings revealed that individuals who are more satisfied with public service provision; have enough tax information; trust government officials in handling their taxes; and have the perception that tax filing procedures are less complex and tax evasion was difficult are more likely to be tax compliant.
Voluntary Tax Compliance
A voluntary act is unrestricted act in the absence of a pre-exiting obligation. However, according to Manhire (2015), since taxpayers have a legal obligation to act in accordance with tax laws, just as they are obligated to comply with all rules that carry the force and effect of law then tax compliance is anything but voluntary in this sense. Manhire (2015) argues that tax authorities do not have adequate resources to assess taxes against each taxpayer directly or audit every return; they therefore rely on individual taxpayers to accurately assess their own tax liability on the annual returns and timely pay the correct amount due. According to Kosiba (2016), the primary role of a revenue authority compliance activity is to improve overall compliance with the tax laws, and in the process instill confidence in the community that the tax system and its administration are fair. However, tax audits remain a major tool for tackling non-compliance. According to Wandera (2018), while KRA has for a long time been seem as an enforcement agency in the eyes of taxpayers it has been working on cultivating better working relationship with taxpayers anchored on trust by exploring measures that promote voluntary compliance among taxpayers. Wandera, (2018) added that the KRA taxpayer education programme is founded on the need to bridge knowledge, attitude, perception and practice gaps among the taxpayers.
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