When presenting the Budget Statement last year, Treasury Cabinet secretary Henry Rotich offered goodies to Kenyans by raising the tax bands by 10 percentage points and increased the monthly personal relief (MPR) from Sh1,162 to Sh1,280, amounting to tax savings of up to Sh609 per month.
I was taught to be thankful, even for the little things, and here is my Asante Sana to Rotich! It would be quite ambitious to expect more Pay As You Earn (PAYE)-related goodies from the Cabinet secretary in this year’s budget statement.
However, Rotich could still make us happier without reducing the personal tax rates as we would all hope for. Here are my suggested simple interventions that would go a long way: The process of filing income tax returns has been simplified over the past few years.
From e-filing of tax returns, which was made mandatory for individuals having a taxable income from 2015 financial year onwards, we have moved to e-assessment of the returns.
Compared to what some other countries have done, a lot more can be done to make tax payments easier and may be even rewarding. I highlight four global best practices that Kenya can adopt, starting from this year’s budget.
Pre-filled income tax returns
Would it not be nice, if all that you had to do was to sign off on an Income Tax return sent to you by the KRA? In Denmark and Sweden, pre-tax returns are sent to taxpayers detailing their taxable income and taxes dues.
Taxpayers can indicate their acceptance of the pre-filled return by email, phone, SMS or on paper. In Denmark, a “no response” is deemed to be acceptance of the tax return.
In Australia, all financial transactions are linked to the taxpayer’s identification number, which is made available to the Australian Tax Authorities and is added in the individual’s online tax return form.
Other countries that have a pre-filled return mechanism in place, in some form or the other, include Chile, Estonia, Finland, Iceland, Norway, Slovenia and Spain.
Suggestion: In Kenya, the taxpayer’s personal information is available based on the past Income Tax returns. In addition, details of tax deduction at source are available in Form xxx (which is the annual tax statement available on the KRA’s iTax portal).
We could take this a step further as the PIN is linked to almost all transactions. Data drawn from banks (such as interest on fixed savings accounts, interest paid or repayment of loans), data from employer on salary earned, to name a few, could be easily collated and a pre-filled return made available to the taxpayer.
It reduces interface with the KRA, saves time and is believed to even cut down on corruption. In Brazil, a multi-layered tax digitisation project (called SPED) enables tax authorities to make inquiries via email, including providing a link to the tax authority’s web page, where taxpayer’s responses can be submitted.
Suggestion: Kenya has taken a step in this direction by way of having the modules inbuilt within the iTax portal. However, the modules are not operational and taxpayers are still served with hard paper tax assessments.
The process should be hastened. Restructuring of income tax bands Fewer income tax bands, or even a flat tax rate without additional surcharge, simplifies income tax calculations and provides administrative ease.
Less complexity translates into more tax compliance and even broadening of a country’s tax base, something which is sorely needed in Kenya. Countries such as the UK and Denmark have a three-tier band structure.
Singapore, Romania, Switzerland, Czech Republic, Hungary and Saudi Arabia have a flat tax rate applicable at all levels of income. Suggestion: Kenya follows a five-tier income tax band structure where the tax rate increases with the level of income.
Those earning taxable income of Sh11,180 per month, or less, pay no tax whereas the highest band of 30 per cent starts upward of monthly income of Sh42,784.
Reducing the number of income tax slabs will be very welcome. Ngundi is a tax manager with EY. Views expressed in the article are personal and may not represent the firm’s view.