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How effective can a tax amnesty be? 

by Lina Omole

The Government of Kenya has recently increased its use of tax amnesties as a tool to enhance tax collection, improve overall tax compliance, and widen the tax net, also by introducing the Voluntary Tax Disclosure Programme. Under this programme a taxpayer voluntarily declares any historic tax liabilities for the years 2015 to 2020 to the Kenya Revenue Authority (KRA). The taxpayer then obtains the benefit of not having to pay, under certain conditions, the resulting penalties and interest.

As of January 2022, the KRA indicated that it had collected KES 5.9 billion in taxes from 6,690 applications. A total of 13,918 applications for disclosure had been made in the same period.

The Kenyan Government is not alone in using tax amnesty as a tool for improving tax collection and compliance. Governments have, particularly in times of recession or when public expenditure is growing quickly, encouraged taxpayers to remit past undeclared taxes by offering amnesties.

Generally, economists believe that taxpayers choose a level of compliance by weighing the trade-off between the comfort of compliance and the penalties imposed on tax evaders and choosing a level of compliance that provides the most optimal level of net benefits. Therefore, one of the ways through which Governments can improve compliance is by enhancing enforcement and increasing penalties for tax evasion.

Therefore, questioning how effective a tax amnesty programme can be is critical. While a tax amnesty programme may increase tax collection and improve voluntary compliance by a few percentage points, these benefits could be short term and may place the government in a position of having to offer amnesties on a regular basis, defeating the very purpose of the amnesty. In addition, where enforcement measures are weak and non-compliance in likely to remain undetected, the uptake of tax amnesty programmes will remain low.

A tax amnesty programme, therefore, cannot operate alone to change the taxpayer’s behaviour and improve tax collection and compliance. For an amnesty program to be effective, it must be supported by heightened enforcement measures. In addition, the legal and economic environment should be unprofitable to evade tax. Other strategies to improve voluntary compliance include taxpayer education, programmes to improve the tax culture by both the revenue authority and taxpayers by promoting simplicity and transparency.

Kenya’s amnesty environment

The KRA has become increasingly vigilant, and is now actively using technology, including blockchain and social media monitoring tools to support collection strategies. In addition, the KRA Investigation and Enforcement Department, supported by the Directorate of Criminal Investigations carries out continuous surveillance, investigation, and criminal prosecution.

Penalties on tax avoidance, deliberate defaults, and fraud have been enhanced while the probability of getting tax exemptions and waivers of penalties has been narrowed.

The combined effect of these efforts by the KRA is that there is now an increased likelihood of detection of tax evasion, audit, punitive penalties, and criminal prosecution on the same, and therefore an increased incentive to take up the program. In addition, taxpayers who may have made genuine mistakes are also opting to tax advantage of the opportunity to declare unpaid taxes and avoid penalties, increasing the effectiveness of the programme.

Taxpayers have until 31 December 2023 to take advantage of the voluntary tax disclosure programme, although the percentage of penalties and interest being remitted is now reduced to 50% and 25% in the year 2022 and 2023 respectively. The increased vigilance by the KRA is likely to improve the uptake of the programme and secure long-term benefits in terms of overall compliance despite the KRA publishing limited data on the success of the amnesty programme.

A tax amnesty is one way to improve collection from the informal sectors of the economy, however, its benefits are short term. The government must demonstrate tangible results in bringing Kenya’s shadow economy into the tax net, whereas policy makers should focus on the bigger revenue gain that comes from policies that enhance voluntary compliance even where government offers no tax amnesty.

Lina Omole is tax senior manager at Deloitte East Africa and he can be reached at lomole@deloitte.co.ke. The views expressed represent those of the author and do not necessarily represent those of Deloitte.

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