This week has been a messy one for both the taxman and the taxed. The news of the arrest of Keroche Breweries directors, Joseph Karanja and his wife Tabitha Karanja, was shocking.
The Karanjas were charged with at least 10 counts of tax fraud, including evading the payment of Value Added Tax (VAT) amounting to Ksh.12.3 billion for stamps allocated for some of their products, and Excise Duty amounting to Sh. 2.1 billion.
Tax evasion is illegal and may be even criminal. This scuffle between KRA and Keroche has dragged for long like a real-life soap opera. The Kenya Revenue Authority (KRA) has raised numerous tax assessments against Keroche; some of these matters are still pending at the Tax Appeal Tribunal, while others are before the courts.
What is KRA’s strategy? Is it focused on results? If so, on what type of results?
On the one hand, KRA will not succeed alone, they need the corporations they tax and harass; and trying to kill them will not make their results look better. On the other hand, tax evasion is killing our innovation and growth.
The Organisation for Economic Cooperation and Development (OECD) estimates that Africa loses $50 billion to tax evasion annually. The United Nations Economic Commission for Africa (UNECA) doubles this figure to approximately $100 billion.
Interestingly, until this matter is not resolved, Kenya will be far from achieving a Sustainable Development Growth (SDG). This is why the KRA has introduced the intelligence based prosecution led investigations model, which links assets acquired through tax evasion schemes in order to trace and recover them.
Curtailing tax evasion is a task that keeps most governments busy. For example, consider the complexity of the infamous missing trader fraud where the transactions, if in the scale of carousels, may involve illegitimate businesses, fraud syndicates, and innocent traders. There is undoubtedly a pressing need for governments to invest in tracking down these criminals.
Evasion is a ragbag of unethical corporate practices, lax and foreseeably corrupt KRA officers, and an incompetent enforcement infrastructure. In order to find solutions to evasion, the Italian economist Emmanuele Bobbio drew a statistical comparison between firms’ capacity for innovation and productivity growth and their proclivity for tax evasion.
The more evasion the less innovation and growth
Bobbio explains that the probability of a firm engaging in tax evasion being caught increases with the amount of taxes the firm chooses not to pay and with its size. Thus, tax evasion represents a correlated distortion, which reduces the effort of tax-evading firms to innovate (growth will increase the probability of being caught) as well as that of regular firms (through unfair competition).
Thus, tax evasion is a downward spiral that shrinks the tax base and makes the country poorer. Evasion creates a vicious circle that lowers innovation, stagnates production and increases unfair competition. The more you cheat, the less you innovative so as not to be caught. This also means that tax compliance enhances innovation, growth and fair competition.