For decades, if not since independence we have been battling perennial budget deficits and counter measures year in year out to overturn the situation. It would have been the case this fiscal year but the COVID-19 disruption threw the fiscal technocrats off balance calling for Solomonic brilliance.
The imminent fiscal strain inspired a raft of proposals passed in a record time in the Finance Act 2020 all in the name of netting more revenue. A notable measure is the introduction of voluntary tax disclosure program (VTDP) outlined in section 89 (7) of the Tax Procedures Act. The new law provides a waiver of interests and penalties to run for three years for tax payers who will voluntarily disclose their undisclosed tax liabilities accruing for the last five years. One may ask, why extend this generosity under the prevailing distress? Well, we have the past to learn from.
A voluntary tax disclosure program is a form of tax amnesty or a general waiver of tax in arrears and/or accruing penalties and interest. Calling for tax amnesty needs a careful thought because tax is a debt due to the state enshrined in the constitution, and waiver of taxes would sound insensitive to taxpayers who have already paid. That’s why in most cases the waiver is on the interest and the penalties, but again states have extended amnesties especially in cases with almost nil compliance in a certain sector.
It will not be the first time to talk about tax amnesty in this country. The most recent call was on repatriation of funds from outside Kenya for any year of income ending on or before 31 December 2017. The Business Daily reported on 10 September 2018 that Kenyans of Indian descent repatriated over Ksh. 13 Billion as a result of the waiver. While introducing a new tax on rental income in 2015, a waiver was extended to bring landlords on the tax net. The results have been a big success story.
Tax amnesties have been offered not just in Kenya. Nigeria netted 94 Billion Naira from 2700 new high net-worth taxpayers in just a 45-day tax amnesty in 2016. In a 2003 programme, South Africa was able to net 3.3 billion Rands with undisclosed wealth being declared. Considering other nations, the effectiveness of tax amnesties has yielded mixed results. The success stories first.
According to a 2006 survey by the Internal Monetary fund, Argentina’s 1995 amnesty yielded $ 3.9 billion while, India was able to net $ 2.5 billion in 1997. But the greatest fairy tale on tax amnesties comes from Ireland. In 1988 Ireland raised over $770 million from one amnesty. This was enough for the country to reduce its borrowing from 10% of the GDP in 1987 to 3.4% in 1988. This was followed by other amnesties in 1993 and 1999. However, the results were negative over these subsequent periods. The best learning point is from Philippines whose 15 tax amnesties between the years 1980 to 1990 led to depressed levels of compliance.
The aforementioned illustrations help us to draw valuable insights as we pursue the voluntary tax disclosure program. Figure out a situation where as a country we would have to reduce public debt because of a successful amnesty program as it was with Ireland in 1988. On the reverse side of Ireland’s story, we learn that leniency should not be over an extended period. This is better illustrated by Philippines 15 amnesties that eroded voluntary compliance. The drafters of this voluntary disclosure program were very keen on ensuring their leniency is not abused. See this amnesty grants full waiver on penalties and interest only in the first year. For the second year this reduces to 50% and 25% in the third year. Proponents of amnesty programs advocate for strict enforcement measures to those who neglect the call. Expect this to be the case after the program.
Finally, my take on the amnesty. This would not have come at a better time than this. For obvious reasons the country is in fiscal distress thus the need to maximize revenue collection not only in future years but also in the past. Bear in mind that this amnesty is only on penalties and interest. It’s obvious, tax compliance levels have been poor and something needs to change. It is also important to allow taxpayers to put their houses in order especially businesses with turnover of less than Sh. 50 million that are expected to migrate to the one percent turnover tax regime. A passionate call to repentance is out there, do not harden your hearts.