Tax amnesty can broaden the country’s tax base

By Alice Owuor

The Government has set higher tax revenue targets for the year 2015/16 at Sh1.358.0 billion, equivalent to 20.8 percent of Gross Domestic Product (GDP). The revenue target is approximately Sh355 billion above last year’s target.

This performance is expected to be achieved on the back of on-going reforms in tax policy and revenue administration.

In order to achieve the set target, KRA is expected to institute measures to expand the revenue base and eliminate tax leakages.

In an effort to support the above, through the Finance Act 2015, the Government has introduced a tax amnesty for landlords who have been under-declaring their rental income or are outside the tax net.

The Government hopes to encourage landlords who have not been paying tax to declare and voluntarily pay any undisclosed tax.

Landlords who take advantage of this window of opportunity to get their tax records in order will benefit from the amnesty as follows;
a) For 2013 and prior – 100% waiver on principal taxes, penalties and interest.
b) For 2014 and 2015 – 100% waiver on penalties and interest.
In addition, landlords who take up the opportunity will not be subjected to tax compliance checks or audit for 2013 and prior, 2014 and 2015 if they fully disclose undeclared rental income and pay tax due. Further, where expenditure records are not available, landlords will enjoy a deduction of forty percent (40%) of gross rental income as expenditure.

To qualify for the tax amnesty, landlords shall be required to make full declaration of the rental income, file tax returns online via iTax system and pay principal taxes for 2014 and 2015 immediately. The amnesty is based on the existing tax regime on rental income and therefore, the current individual tax rates (i.e. graduated scale – 10% to 30%) will be used to determine the tax payable. For companies, the corporation tax rate of 30% on net rental income is applicable.

The tax amnesty is valid from 1st July 2015 up to 30th June 2016.

In cases where landlords will fail to fully disclose tax due and KRA has evidence on the same, further tax assessment will be made and payment of tax due (including penalties and interest) will be enforced as per the law. By law, KRA is allowed to demand taxes applicable as far as seven (7) years back.

Globally, tax compliance management is no longer based purely on an enforcement focused approach, but on a combination of enforcement and enhanced taxpayer services.

Studies have shown that high tax compliance costs and complex systems tend to reduce tax compliance among taxpayers.

Some Landlords have been facing challenges in complying with tax on rental income due to fear arising from huge back taxes for the past years leading to low tax compliance.

In Kenya, high cost of compliance, complex tax system, poor record keeping and huge back taxes are some of the key factors hindering voluntary tax compliance among property owners.

Tax amnesties are growing in popularity as governments seek ways to seal revenue gaps whilst encouraging voluntary compliance in sectors with low tax compliance levels.

Even developed countries with robust mechanism for tax administration have also turned to amnesties. In United Kingdom for example, they launched an 18-month amnesty in 2013 to recover £500million a year of lost tax on rental income after it was estimated that up to 1.5 million landlords might have underpaid or failed to pay what was owed.

At the moment, KRA and Government are automating and digitizing most of the services and this will enhance tax collections and reduce revenue leakages through exchange of information via linkages with relevant third party systems.

The Real estate sector is a vibrant sector that should be contributing more to the economy. Indeed, the sector (building and construction) has witnessed a commendable average growth rate of 8.4% over the last seven years. In addition, the sector’s contribution to GDP has grown to Sh420 billion by 2014.

By broadening the tax base, the country will ensure vulnerable people in the society do not bear a higher tax burden. In reality, tax contribution should be fair, transparent and based on relative ability to pay.

Most property owners fall within the category of well to do individuals who should be positively contributing to national development by paying their fair share of taxes.

Alice Owuor, is the Commissioner of Domestic Taxes, Kenya Revenue Authority

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