Kenya: Graft cost counties Ksh185bn in taxes

Kenya's counties are facing a significant revenue shortfall, with a staggering gap of 185 billion Kenyan shillings between their potential internal revenue and the actual collections, according to a recent tax gap impact report. The report, conducted by the Commission of Revenue Allocation and the World Bank, highlights the stark contrast between counties' revenue potential of 216 billion shillings and their average yearly collections of 31 billion shillings. This stark discrepancy is severely impacting the ability of counties to provide essential services and invest in crucial projects that benefit their citizens. To delve deeper into this concerning issue, Alex Kanyi, a Tax Partner at Cliffe Dekker Hofmeyr, shed light on the challenges and underlying factors contributing to the revenue shortfall. One of the key concerns raised by Kanyi is the detrimental impact of the revenue gap on critical services such as healthcare and disaster response. He emphasized the pressing need for counties to maximize their revenue potential to alleviate the strain on their budgets and reduce dependence on federal allocations. With counties struggling to fund essential services and address pressing issues like drought, the failure to bridge the revenue gap has far-reaching implications for the well-being of citizens across Kenya. The dependence on equitable cash disbursed by the national treasury is also a point of contention, with Kanyi highlighting the inadequacy of these funds in meeting the diverse needs of counties. Delays in the disbursement of national government allocations further compound the challenges faced by counties, impeding their ability to plan and execute vital projects effectively. Despite counties being entitled to substantial sums, the sporadic nature of these disbursements hampers long-term financial planning and resource allocation, leading to inefficiencies and compromising service delivery. Corruption and inefficiencies within revenue collection processes have been identified as significant contributors to the revenue shortfall. While the exact portion of revenue lost to corruption remains unspecified, Kanyi underscored the detrimental effects of manual systems, misreporting of revenue, and capacity gaps within county administrations. Manual cash collection methods coupled with opaque reporting structures have created loopholes for revenue leakage, exacerbating the revenue challenge faced by counties. Moreover, political appointments rather than professional expertise in key administrative roles have hindered counties' ability to optimize revenue generation and plug leakages effectively. Collaboration with the Commission of Revenue Allocation and a concerted effort to enhance transparency and capacity within county governments are essential to address these systemic issues. The original vision for counties in Kenya involved a balance between national government allocations and independent revenue generation. While certain taxes remain under the purview of the national government, counties have been empowered to collect revenue from various sources, including property and entertainment taxes. Despite having a wide array of revenue streams at their disposal, counties have struggled to fully leverage these opportunities, leading to a significant disparity between potential and actual collections. The need for a comprehensive strategy to diversify revenue sources, enhance capacity, and combat corruption and inefficiencies is paramount in bridging the revenue gap and strengthening the financial sustainability of Kenya's counties. In conclusion, the challenges facing Kenya's counties in revenue collection and utilization are multi-faceted and require a holistic approach to address. By addressing corruption, improving revenue reporting mechanisms, enhancing professional capacity, and diversifying revenue sources, counties can unlock their full potential and better serve the needs of their constituents. Failure to bridge the revenue gap not only jeopardizes service delivery and project implementation but also perpetuates a cycle of financial dependency that undermines the autonomy and effectiveness of county governance.