Kenya’s Tax Modernization Drive to Enhance Compliance and Revenue Collection

Kenya’s government is embarking on a sweeping overhaul of its tax collection systems to combat tax evasion and improve compliance. Through the Medium Term Revenue Strategy (MTRS), the National Treasury is targeting the modernization of key tax administration platforms, such as the Integrated Customs Management System (iCMS) and iTax, to make tax collection more efficient and effective. This ambitious effort is seen as a cornerstone of the government’s strategy to boost domestic revenue generation, close fiscal deficits, and achieve a balanced budget by the financial year 2027/2028.

The announcement was made during the Kenya Revenue Authority (KRA) Summit, where Prime Cabinet Secretary Musalia Mudavadi emphasized the critical role of technology in transforming tax administration. Mudavadi noted that modern tax systems must be equipped to adapt to the evolving economic landscape, leveraging technology to not only increase revenue collection but also foster trade facilitation.

The Role of Technology in Modernizing Tax Systems

Kenya’s tax collection infrastructure has long been riddled with inefficiencies, contributing to significant revenue losses due to tax evasion and non-compliance. By modernizing systems like iCMS and iTax, the government aims to tackle these issues head-on. Mudavadi emphasized the need for tax administrations to adopt technology-driven solutions, noting that innovation will be key to enhancing both compliance and revenue generation.

“Innovation, from digital taxation platforms that simplify compliance to blockchain technologies that enhance transparency in trade logistics, offers powerful tools for revenue generation and efficient trade management,” Mudavadi said at the summit. This vision underlines the importance of integrating cutting-edge technologies into the country’s tax systems to stay ahead of the curve in a rapidly changing global economy.

Artificial Intelligence (AI) and Machine Learning (ML) are also expected to play a critical role in the country’s revamped tax administration processes. These technologies can process vast amounts of data, identifying patterns of tax evasion and optimizing resource allocation. Humphrey Wattanga, KRA Commissioner General, highlighted the potential of AI and ML to revolutionize tax administration by making it more data-driven and proactive.

“AI and machine learning will enhance vast data sets to identify tax evasion patterns, optimize resource allocation, and predict future revenue streams,” Wattanga explained. He added that these technologies will enable authorities to better understand taxpayer behavior, personalize outreach efforts, and implement policies that encourage voluntary compliance.

Tackling Tax Evasion and Non-Compliance

One of the main objectives of the tax modernization strategy is to increase tax visibility, particularly for value-added tax (VAT) and rental income tax, two areas where revenue collection has significantly lagged behind potential. National Treasury and Economic Planning Cabinet Secretary John Mbadi pointed out that Kenya is currently collecting only 3.8% of GDP as VAT, even though the potential is around 6%. This discrepancy is largely due to challenges in tracking and enforcing VAT compliance.

“If you look at VAT, we have the potential to collect 6% of GDP as VAT, but we are collecting only 3.8% because tax visibility is a challenge. We are developing a system which must enhance tax visibility,” Mbadi said.

Similarly, Kenya is under-collecting rental income tax. The government currently collects Ksh 17 billion annually in rental income taxes, yet the potential is closer to Ksh 100 billion per year. Improving the visibility and tracking of rental income streams is expected to significantly boost this figure. With the new tax systems in place, authorities will be able to better monitor and enforce compliance, ensuring that tax revenues more accurately reflect the country’s economic activity.

Aiming for Fiscal Stability

The modernization of Kenya’s tax systems comes at a time when the government is grappling with a growing fiscal deficit. The National Treasury has set a target to reduce the fiscal deficit to 3% and achieve a balanced budget by FY2027/2028. To meet these ambitious goals, the government is committed to implementing both tax administration and tax policy reforms that will raise additional revenue.

Mbadi explained that the government’s efforts to improve tax compliance are part of a broader strategy to stabilize the country’s fiscal position and reduce reliance on external borrowing. “We are committed to implementing both tax administration and tax policy measures to raise additional revenue in order to reduce fiscal deficit to 3% and achieve a balanced budget by FY2027/2028,” Mbadi said.

To support these efforts, the Treasury is considering increasing the KRA’s budget by at least 30% in the FY2025/24 budget. This budget increase is expected to strengthen the KRA’s capacity to carry out its mandate, including the adoption of new technologies and the hiring of additional staff to fill key positions. Mbadi has directed the KRA board to begin the process of appointing staff to acting positions, ensuring that the authority has the necessary human resources to implement the tax modernization plan.

Enhancing Domestic Resource Mobilization

Kenya’s modernization drive is part of a broader global trend toward using technology to enhance domestic resource mobilization. As economies become more digitized, tax authorities worldwide are increasingly turning to digital tools to improve tax administration. For Kenya, these technological advancements offer a pathway to reduce the tax gap—the difference between potential tax revenues and actual collections—while promoting voluntary compliance among taxpayers.

By making tax systems more efficient, the government aims to simplify compliance for taxpayers, reduce the cost of tax administration, and improve the overall taxpayer experience. This, in turn, is expected to encourage more people and businesses to comply with tax laws, thereby broadening the tax base and increasing revenue collection.

Mudavadi highlighted that the adoption of digital taxation platforms will also help to reduce the administrative burden on businesses, making it easier for them to comply with tax regulations. “Digital taxation platforms that simplify compliance not only enhance revenue collection but also reduce the administrative burden on businesses, allowing them to focus on growth and innovation,” he said.

Challenges and Opportunities

While the government’s tax modernization efforts hold great promise, there are also significant challenges to be addressed. The successful implementation of these reforms will require substantial investment in both technology and human resources. The KRA will need to ensure that its staff are well-trained in the use of new technologies and that taxpayers are educated about the changes to the tax system.

Additionally, the government must navigate the potential risks associated with adopting advanced technologies such as AI and ML. These technologies come with concerns about data privacy and cybersecurity, and the KRA will need to implement robust safeguards to protect taxpayer information and maintain public trust.

Despite these challenges, the opportunities presented by tax modernization are immense. By leveraging technology, Kenya can transform its tax administration systems, improving compliance, boosting revenue, and promoting sustainable economic growth. The modernization of tax systems will not only help the government meet its fiscal goals but also support broader efforts to improve governance and build a more inclusive economy.

Conclusion

Kenya’s decision to modernize its tax systems marks a pivotal step toward enhancing tax compliance and revenue collection. Through the adoption of advanced technologies such as AI, ML, and digital taxation platforms, the government is positioning itself to better combat tax evasion, improve tax visibility, and increase voluntary compliance among taxpayers.

With the National Treasury and KRA committed to driving these reforms forward, Kenya is on track to create a more efficient and effective tax administration system. This modernization effort will play a crucial role in helping the country achieve its fiscal targets, reduce its fiscal deficit, and build a more resilient and sustainable economy. As Kenya moves into this new era of tax administration, the successful implementation of these reforms will be key to realizing the full potential of the country’s revenue collection efforts.