The Exchequer Robbed of Sh275 billion per year, but the economy is okay.

Ecoke has been looking at official economic data released by the KNBS in the past five years and wondered why they rily do not add up. For instance two years ago, as the bureau of statistics released data indicating that the Kenyan economy grew by a narrow margin of 1.6 per cent, I got even more interested in the art of measuring economic growth and what economic parameters were considered.Sales across our product range grew by more than 20 per cent yet some of the official data was showing that the economy expanded by a thin margin of less than two per cent. “There is certainly something wrong in the way we are measuring growth.” Hundreds of Kenyans have increasingly had to face junior economist predicament after failing to reconcile the level of economic activity they see in their neighbourhoods with what official data says.
Parliament’s Budget Office (PBO) says the answer lies in Kenya’s large and rapidly expanding underground or grey economy that is never captured in official data but now accounts for nearly half of the country’s Gross Domestic Product. Kenya’s underground economy has expanded rapidly in the past five years to become a mammoth Sh825 billion industry that is denying the government at least Sh275 billion in uncollected revenues, the PBO says. This means Kenya Revenue Authority (KRA) is tapping only half of the estimated Sh750 billion tax revenues potential, leaving those already in the tax bracket with the heavy burden of financing public services and ultimately economic growth and effectively means the national economy is nearly twice the current estimate of Sh1.6 trillion.The underground economy – commonly defined as commercial transactions that go unreported or unrecorded for tax purposes – has traditionally been made up of hawkers, small-scale farmers, carpenters, dressmakers, watchmen, construction workers and domestic workers (maids and gardeners).
In the past couple of years however, the real estate and agriculture sectors have attracted big money without a commensurate rise in tax revenues raising doubts on the effectiveness of the revenue collection machinery.
Economists say it is these underground consumers who are driving the growth of sales for companies like ARM without getting captured in the official data. The PBO says allowing millions of people to gain from the economy without contributing to the national revenues has become a major threat to wealth distribution and social stability in Kenya that the country must immediately confront.This is because evading taxes makes it harder for those who are being taxed to compete with those outside the tax bracket besides creating price distortions in the marketplace. It estimated that goods produced by those who pay taxes are, for example, 16 per cent more expensive that that from the tax cheats.
Though workers’ salaries have risen steadily over the past five years, high levels of inflation and the accompanying erosion of purchasing power has effectively offset the gains forcing millions to cut back on consumption.“The size of the underground economy reflects a lack of information by the Government that ultimately hampers policy choices,” the PBO says in a status report published last month. “It therefore becomes easier for the Government to continue taxing those who are easy to get and leaving the formal sector workers with the burden of sustaining the economy,” says the report.Growth in the number and volume of businesses outside the tax net has continued despite KRA’s heavy investment in new structures to expand its reach.
Since coming to power in January 2003, the Kibaki government has applied a mix of enticement and coercion to get the number of registered tax payers needed to finance a budget that has nearly doubled in the past seven years. In January 2008, for instance, the Government introduced a three per cent turnover tax targeting small and medium-sized firms with annual total sales of between Sh500,000 and Sh5 million.But tax experts say revenue leakage remains massive leaving the tax burden on the shoulders of the few players in the formal sector. “The situation is such that small businesses are not registering or the system is so weak to capture and follow them,” Its apparent that chasing small taxpayers is an expensive assignment but maintains that the cost could be significantly offset with the right compliance machinery.Treasury’s latest report indicates that cumulative revenues stood at Sh132.9 billion or 4.9 per cent of GDP at the end of September, against a target of Sh154.9 billion or 5.7 per cent of GDP, putting the government on a tight leash that points to spending cuts or heavy borrowing in the coming months.
It is expected that the resulting financing gap will force the government to scale back some of its investment plans or push Treasury further down the path of deficit financing beyond the Sh105 billion cap set for domestic borrowing the in the current financial year. “If the underground economy remains untaxed, the government will continue losing billions of shillings in revenue and as more people move into the informal sector to escape the burdensome taxation, it will become increasingly difficult for the government to hit its revenue targets,” .