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Navigating Fiscal Crossroads: An IPF Analysis of Revenue Challenges, Regulatory Hurdles, and the Quest for Fiscal Justice
Examining the Interplay of Revenue Shortfalls, Compliance Gaps, and the Imperative for Transparent and Equitable Fiscal Management in Kenya
Gerald Kombo
May 13, 2025
(Daniel Murakaru, researcher Institute for Public Finance)
At a workshop centered on the intricacies of budget and tax policy, Daniel Murakaru, a seasoned researcher with the esteemed Institute for Public Finance (IPF), presented a comprehensive and multifaceted analysis of the government's prevailing fiscal strategies. His discourse meticulously dissected critical areas, including the persistent challenges in revenue generation, the imperative of adherence to established legal and regulatory frameworks, the debilitating impact of the burgeoning crisis of pending government payments, the often-understated complexities and loopholes within nascent digital governance systems, and the overarching principles of equity and fairness that should underpin the nation's financial architecture.
Murakaru initiated his analysis by drawing attention to a consistently troubling pattern: the discernible inconsistency between the ambitious revenue projections articulated within successive national budgets and the often-disappointing reality of actual revenue collection.
"We are seeing a mismatch," he observed with a note of concern. "The government continues to project significant growth in revenue with each iteration of the Finance Act, yet the empirical evidence reveals that these targets are rarely met. This fundamental disconnect carries profound and far-reaching implications, particularly concerning the allocation and execution of priority expenditures that are essential for the nation's development and the well-being of its citizens."
In support of his assertion, Murakaru pointed to the foundational tenets enshrined within Article 201 of the Constitution, which lays down explicit principles governing public finance, emphasizing accountability, equity in the distribution of the tax burden, and transparency in both the formulation and execution of the national budget. He further underscored the relevance of the Public Finance Management (PFM) Act, the primary legislative framework designed to ensure prudent and responsible management of public resources throughout the entire fiscal cycle.
Moving on, Murakaru addressed the perennial and economically damaging issue of delayed tax refunds, with a particular focus on Value Added Tax (VAT). He cogently argued that the protracted delays in processing these refunds act as a significant deterrent to the growth and dynamism of businesses across the spectrum.
"When refunds are delayed, it tightens liquidity, especially for small businesses," he elaborated. "For these enterprises, timely access to working capital is often the lifeblood of their operations. Protracted delays can stifle investment, hinder expansion, and ultimately undermine taxpayer trust in the fairness and efficiency of the tax system. This not only hurts revenue generation in the long run by dampening economic activity but also fundamentally violates the core PFM principles of efficient and timely utilization of public resources."
A particularly contentious aspect of the Finance Bill 2024 proposals, the potential granting of real-time access to data from mobile money operators and potentially even bank accounts to the Kenya Revenue Authority (KRA), came under intense scrutiny from Murakaru. He articulated significant constitutional and legal concerns, explicitly citing the safeguards provided by the Data Protection Act and the fundamental right to privacy enshrined in Article 31 of the Constitution.
"We need to ask tough questions," Murakaru insisted. "Under what clearly defined circumstances will the KRA be granted access to this highly sensitive personal and financial data? Will a legally obtained court order be a prerequisite for such access? What robust protocols will be in place to govern how this data is stored, who will have the authority to access it, and what independent oversight mechanisms will be established to audit and prevent potential abuse?"
He astutely emphasized the delicate balancing act required between the legitimate need for effective revenue enforcement and the fundamental rights of citizens to privacy and the security of their digital transactions, especially in an economic landscape where digital payments are playing an increasingly central role in formalizing economic activity.
Turning his attention to the operational challenges within public digital systems, Murakaru cited a compelling example from the scrap metal sector, where businesses diligently applying for mandatory digital licenses continue to encounter frustratingly long delays.
"Even after meticulously submitting all the required documentation through the designated digital platforms," Murakaru pointed out, "we have received numerous credible reports from businesses in the scrap metal industry detailing waits of several months for their licenses to be processed. If the very purpose of implementing a digital licensing system is to streamline administrative processes, enhance efficiency, and reduce bureaucratic bottlenecks, then why are these significant delays persisting?"
Such instances, according to Murakaru, serve as stark reminders of the potential gaps and inefficiencies that can plague public digital infrastructure. He stressed that the mere existence of digital systems is insufficient; they must be demonstrably functional, reliable, and user-friendly to achieve their intended objectives. These persistent delays not only stall legitimate business operations but also inadvertently hinder compliance, particularly for resource-constrained Small and Medium-sized Enterprises (SMEs).
Murakaru also drew attention to the lingering impact of the COVID-19 era on the nation's tax compliance landscape. The widespread disruptions, including partial or complete business closures and a significant shift towards informal economic activities, have made it considerably more challenging for many businesses to meet their tax obligations.
"We cannot operate under the simplistic assumption that all instances of non-compliance are attributable to intentional tax evasion," Murakaru cautioned. "A significant segment of the business community, particularly smaller enterprises, genuinely experienced a severe erosion of their operational capacity during the pandemic and continue to grapple with its economic aftershocks. This necessitates a shift towards more supportive and understanding interventions from the revenue authorities, rather than solely focusing on punitive measures."
He passionately advocated for the implementation of carefully considered regulatory reforms, fully aligned with the principles enshrined in the PFM Act, that aim to bolster the resilience of small businesses while simultaneously upholding the critical imperative of revenue collection for national development.
The escalating crisis of pending government bills came under sharp focus as a critical threat to the very foundation of effective revenue mobilization. Murakaru astutely framed the government's failure to promptly settle its outstanding obligations to suppliers as a significant disruptor of liquidity throughout the entire private sector.
"There’s a clear and damaging chain reaction in play here," Murakaru explained with concern. "If suppliers of goods and services to the government remain unpaid for extended periods, their own financial capacity is severely constrained, rendering them unable to meet their own tax obligations, such as remitting VAT or income tax. Therefore, decisively addressing and resolving the burgeoning backlog of pending bills is not merely an accounting exercise; it is a fundamental prerequisite for restoring financial stability and ensuring consistent revenue flow."
This critical issue, Murakaru emphasized, directly contravenes PFM Act Section 94, which explicitly mandates the timely settlement of all legitimate government financial obligations, and also runs counter to Article 201(d) of the Constitution, which underscores the paramount importance of fiscal discipline and the prudent management of public debt.
Murakaru also raised concerns regarding the often-poorly timed and inconsistent nature of government support initiatives across various key sectors, including housing and agriculture, highlighting a lack of effective coordination with real-time market dynamics and actual needs on the ground.
He offered a pointed critique of the rollout of the ambitious Housing Fund, suggesting that while the aspiration of facilitating homeownership is laudable, the prevailing high interest rates in the financial sector and persistent delays in the actual execution of affordable housing projects are significantly hindering public uptake and rendering the initiative less effective.
"We find ourselves in a paradoxical situation where we have established dedicated housing funds, yet the availability of genuinely affordable housing units remains limited," Murakaru observed. "There must be a far more effective and dynamic synchronization between the provision of financing mechanisms and the actual delivery of tangible housing solutions that are accessible to the intended beneficiaries."
Furthermore, Murakaru made a compelling case for a comprehensive review of the existing income tax bands, with the overarching aim of fostering a more genuinely progressive taxation system. He argued that the current structure places a disproportionate burden on lower-income earners while potentially under-taxing wealthier segments of society.
"We need to undertake a careful and thorough reconsideration of our income tax banding structure," Murakaru asserted. "The empirical evidence suggests that individuals and families at the lower end of the income spectrum are feeling an increasingly acute financial pinch due to the current tax regime, while those in more affluent income brackets may not be contributing proportionally to the national revenue base."
This crucial call for reform, Murakaru emphasized, resonates deeply with the fundamental obligations enshrined in the PFM Act to ensure equity and fairness in the distribution of the tax burden, as well as with the constitutional principles articulated in Article 201(b)(i) concerning the fair and just imposition of taxation.
Finally, Murakaru underscored the indispensable role of public access to information in fostering transparency and accountability in public finance, explicitly invoking the provisions of the Access to Information Act and the fundamental right to information guaranteed by Article 35 of the Constitution.
"The citizens of this nation have an inherent right to understand the rationale behind and the detailed processes involved in the formulation, execution, and subsequent auditing of the national budget," Murakaru declared. "Meaningful public participation in fiscal policy decisions can only occur when citizens are adequately informed about the proposed tax measures, their potential impact, and the overall management of public resources."
In his concluding remarks, Murakaru's overarching message was unequivocal: Kenya's ongoing fiscal reforms must be firmly anchored in robust legal safeguards, meaningful public participation, unwavering transparency at all levels of financial governance, and the establishment of a truly functional and reliable digital ecosystem for public service delivery and revenue management.
Ultimately, it is not sufficient to simply focus on the quantum of taxes collected; we must equally, if not more so, critically examine the fundamental questions of how these taxes are collected, from whom they are levied, and at what broader economic and social cost to the nation.