The Kenya Revenue Authority (KRA) has regained powers to seek workers’ and businesses’ financial transactions from third parties like banks, mobile telephone firms and schools in an effort to crack down on tax cheats.
The Court of Appeal has reinstated sections of the law, which were frozen in 2018, allowing KRA to get information from third parties on persons or firms suspected to be tax cheats.
The court ruling issued last week compels firms like Safaricom to share M-Pesa records with KRA, schools to share fees payment records with the taxman and for banks to share clients’ data.
The restored Section 60 of the Tax Procedures Act compels all such third parties to share information with the taxman. Those that defy KRA’s orders will be liable to a fine of Sh1 million or a jail term of three years or both should they fail to provide details to the taxman.
KRA is seeking to match data from the third parties capturing flow of cash against tax remittances in the race to nab those evading duty payments.
Paul Matuku, KRA’s Commissioner for Legal Services, said the courts have opened the way for the authority to seek records from third parties as well as to search and seize documents from suspected tax cheats
“KRA could not interrogate or question the correctness of tax or duty declaration using third party data further than what had been declared by the taxpayer in the self-declaration form,” Mr Matuku told the Business Daily in reference to the frozen law.
“It meant that KRA could not seek for documents or information to confirm the veracity of what has been filed in the self-assessment declarations.”
In May 2018, Justice George Odunga had declared sections 44(1) and (2), 60(1) and (3) and 59(4) of the Tax Procedures Act, 2015, unconstitutional.
This made it possible for suspected tax cheats to challenge records obtained from third parties in court suits.
In the appeal against Justice Odunga’s ruling, KRA said the decision had crippled its mandate and derailed it from hitting its tax collection targets.
Banks now form a key plank in KRA’s latest approach that emphasises on data gathering from third parties like the motor vehicle registration unit, property approval agency and Kenya Power in the war against tax evasion.
The information sought includes account balances and flow of income. This enables authorities to check whether taxpayers have correctly declared their income.
KRA detectives have identified wealthy individuals and companies that owe it an estimated Sh250 billion in what promises to be the biggest crackdown on high net-worth individuals and entities.
The taxman’s intelligence and strategic operations unit, which has a team of about 100 investigators, has in recent months been investigating rich people’s sources of income and expenditure against their tax remittances.
It has also been analysing companies’ financial dealings, especially firms doing business with the government and counties, to nab tax cheats by matching their payments and incomes declared to KRA.
The KRA enforcement unit has been using various databases to pursue suspected tax cheats, including bank statements, import records, motor vehicle registration details, Kenya Power records, water bills and data from the Kenya Civil Aviation Authority (KCCA), which reveals individuals who own aircraft.
Car registration details are also being used to smoke out individuals who own high-end vehicles but have little to show in terms of remitted taxes.
Kenya Power meter registrations are helping the taxman to identify landlords, some of who have been slapped with huge tax demands.
KRA says a sharp increase in imports of the luxury goods and multi-million-shilling investments in real estate have opened its eyes to a potentially massive tax leakage, which if tapped could yield billions of shillings in additional revenues to the Exchequer.
The taxman is racing to bring more people into the tax brackets and curb tax cheats and duty evasion in the quest to meet revenue targets that KRA has persistently missed in recent years.
This year, the economic slowdown in the wake of the Covid-19 pandemic and tax cuts imposed to protect the economy against the effects of the disease is expected to hit tax collection hard.
The proposed income and corporate tax cuts aimed at protecting the economy against the effects of the coronavirus pandemic will cost KRA Sh1.3 billion daily over the next three months, Parliament’s budget office has warned.
The Parliamentary Budget Office (PBO) has now warned that lower revenue collection will compromise the State’s ability to deal with emergencies given that civil servants’ salaries, debt repayments and allocation to counties already eat up 94 percent of government revenue.
Government spending on development projects like roads, power plants and water infrastructure will be reduced too, further hurting the economy given that State spending puts money in the pockets of workers as well as private firms linked to infrastructure works.