The tax compliance burden

July 9, 2009
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, BY CHRISTOPHER KIRATHE

 

NAIROBI, Kenya – As the Kenya Revenue Authority continues to bask in the glory of increased tax collections year over year (save for the current seeming plateau), perhaps the question that begs is, at what price is this achievement to the tax payer? What is interesting is that the government believes there is still a tax gap.

The “tax gap” is the difference between what the government thinks taxpayers should be paying and what it collects. The government currently estimates this at about Sh150 billion.

We can perhaps attribute this increase in tax collections to increased compliance, since there has not been any tax rate change in the recent past -even with the infamous post election chaos when most businesses were reeling from major losses!.

Tax compliance however comes with costs. Compliance costs are those incurred by taxpayers in meeting the requirements imposed on them by the law and the revenue authorities, over and above the actual payment of tax and any distortion costs inherent in the nature of the tax.

The costs include;

•labour costs (owner, unpaid help, internal bookkeeper/accountant or other employee who handles taxes),
•external costs (book-keeping/accounting office),
•other internal non-labour costs (software and hardware etc),
•forms and stationery,
•postage and telephone,
•instructional literature and seminars,
•traveling costs,
•Court costs etc.
•Tax planning is included as an inherent part of tax compliance costs.
•There are also psychological costs directly or indirectly (quantitatively) relating to tax compliance.
• There are also “initial” (“temporary” or “commencement”) costs, when a tax payer starts being compliant. An example of these in Kenya would be the Electronic Tax Register (ETR) costs etc.

Compliance costs are therefore the administrative and time costs of complying with legislation as opposed to the substantive costs imposed by legislation like the amount of tax to be paid.

A taxpayer’s inherent character and situation, as well as the behaviour of other taxpayers and the authorities, may have an impact on compliance. It is common knowledge that some taxpayers intentionally try to reduce the amount of tax that they have to pay. Where this is done legally, it is known as tax avoidance. Otherwise, it is known as tax evasion, which is illegal. Most tax evasion takes the form of under declared income, the claiming of higher tax deductions than the taxpayer is entitled to and failing to file tax returns. Increased compliance therefore means reduced evasion, and in some cases, reduced avoidance.

However, it should not be lost that other tax payers voluntarily and diligently pay all the taxes as per requirement. These tax payers have in deed often been used by the government in putting the non compliant persons into the tax net through agency taxes.

What is pitiful is that most of the financial and social compliance costs have ended up being borne by the honest ones, in the name of catching the few who evade the tax. Small businesses have in fact borne a greater relative burden of tax compliance costs based on their revenue or management time. These tax payers have felt this as an extra burden, which the government should consider reimbursing them.

Indeed, the cost of tax compliance is one of the factors which most surveys have indicated to be detrimental in respect of compliance.

Studies conducted in South Africa identified tax compliance requirements as stumbling blocks especially for Small and Medium Enterprises (SMEs). It was noted that compliance swallows up resources that could be devoted to a more effective running of these businesses. The majority of SMEs experience their tax liability as an increasing burden; they do not have enough skilled staff to handle tax compliance issues and often have to incur ‘extra’ tax costs as a result. SMEs are also often unaware of the tax incentives and services available to them.

In addition, they noted that changes in tax policies sometimes result in an even more complex tax system. It was found out that small businesses (and probably other taxpayers as well) would prefer simple cuts in tax rates and penalties rather than elaborate tax incentive schemes which require sophisticated systems and skilled staff and often result in increasing compliance costs rather than provide real tax relief.

In view of this, I suggest that the government seriously considers the following:

1.Reduce the number of taxes and levies that SMEs have to administer. For every type of tax/levy, an additional form usually needs to be completed. By reducing the levies, one automatically reduces the number of forms as well. This in turn makes it easier to train staff to administer compliance with the tax liability, because less needs to be taught and less needs to be known.

2.The government could also reduce compliance requirements. For example, it could centralise taxes/levies collection to one office and make the different taxes payable at the same time. The aim should be to reduce the number of forms and returns that have to be completed in a year.

3.The law could be streamlined and simplified. Turnover Tax was a good step towards achieving this. However, this was reversed in June this year and left only to individuals or business names (companies, rental income and consultants excluded). It is worth noting that SMEs may take any legal form. Tax advantages should therefore be availed to all legal forms.

4.Additional tools could be made available to SMEs and other taxpayers to assist them in administering taxes. In this regard, the possibility of providing free software packages to taxpayers to calculate tax liability automatically should be considered. Although this would normally be beyond the scope of its duties, the government could consider making a free accounting package available on the KRA website. Little human effort would thus be required to compute taxes.

(Christopher Kirathe is a Manager, Tax & Legal with Ernst & Young.  The views expressed are personal)

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