Enforcement Effort by Revenue Authority, Tax Base Expansion and Performance of
Turnover Tax
Two types of tax enforcement tactics are employed to encourage tax compliance: forceful and
persuasive approaches. The coercive strategy encourages harsh actions, while the appealing
approach encourages taxpayer collaboration. The cumulative effects of these contradictory
approaches have received little study. Tax authorities in wealthy and developing countries have a
common challenge: encouraging tax performance (Silvani 2008). Tax authorities have developed
various performance procedures and techniques in response to this difficulty, which is primarily
dependent on the type and size of the taxpayer. The approaches employed to handle small and
large business tax performance differ because of the dangers they pose and the money they
contribute to the tax system (Baer 2002; OECD.2009).
Large corporate taxpayers (also known as large taxpayers) account for most tax collections and
are critical to the tax system's revenue goals. Large taxpayers vary from regular taxpayers in
terms of the enormous tax revenues they generate and the risks and complications they pose to
the tax system. Tax authorities worldwide to ensure that large taxpayers comply with their
obligations by using a persuasive rather than coercive approach (Donnelly and Heneghan, 2010)
have established large Taxpayer Offices (LTO). The coercive concept, also known as deterrence
or a stick-based strategy is widespread in the small and medium taxpayers division, where
taxpayers comply with their tax duties if penalized for non-compliance.
Higher audit possibilities and harsh fines, in general, encourage tax compliance. The likelihood
that the tax authorities will uncover an individual's non-performance and seek to rectify the
evasion is the probability of detection. Individuals usually want to avoid paying their taxes
altogether, and the only reason they might not is that there is a non-zero chance of being detected
(Massimo, 1993). Tax performance will increase if the likelihood of discovery increases and tax
audit is one of the most influential detective tactics tax authorities utilize (Alm, 1991). In reality,
tax audits are thought to have a direct deterrent effect on those who are audited and an indirect
deterrent effect on those who are not audited (Alm 2004). However, according to Beron (1990),
tax audits have only a minor positive impact on tax compliance.
The link between tax performance and the harshness of punishments is another central element
impacting tax compliance. The theory is that the threat of fines deters tax evasion. Setting up an
effective mechanism to punish tax evaders is a critical step in encouraging tax compliance. If
non-performance can result in significant penalties, taxpayers are more likely to comply. The
persuasive or collaborative approach believes that treating taxpayers with respect and providing
them with the opportunity to participate in the taxation process will help them comply with the
law. External material, such as a tax penalty, enforces performance with tax obligations, whereas
persuasive tools, such as taxpayer service inspire performance by exerting psychological
pressure on taxpayers. The obvious question is which instruments are more significant for
understanding small and medium-sized tax performance and why.
Tax Base Expansion and the Performance of Turnover Tax
Tax is a vital source of revenue for government development programs; thus, governments must
make every effort to collect it accurately and efficiently to make government operations easier.
The Kenyan government has recently implemented essential reforms to tax policy centered on
maintaining equity, expanding the tax base, supporting higher investment, and reducing the tax
performance burden to maximize revenue collection and efficiency in tax administration.
The introduction of a consumption tax - the sales tax - in 1973 was the first significant
modification to the tax system following independence. It was the first significant change to the
tax system. Import limits connected with an import substitution industrialization policy harmed
customs duty revenue receipts, which prompted this modification. The establishment of capital
gains tax (C.G.T.) in 1975 was another move to broaden the tax base, as it capitalized on high
property prices resulting from the coffee boom. However, in 1984, to restart economic growth
through the construction industry, GoK halted the C.G.T. and established a commission to
evaluate financial management and recommend future modifications (A.D.B., 2010).
According to research by the Parliamentary Budget Office (2010), the government could have
raised the revenue base by Kshs.79.3 billion in 2008 if tax cheating among S.M.E.s had been
tackled. According to the KRA annual report for the year ended 2012, the amount lost in taxes
was Ksh 108 billion, with the informal sector and S.M.E.s bearing the brunt of the loss. (K.R.A.,
2013 Annual Tax Report) S.M.E.s are constantly increasing and have the ability to generate
revenue streams, but they have been left out of the tax bracket in the past. In general, the
government would continue to lose billions of shillings if the informal economy stays untaxed
and more individuals shift into it. This situation will influence the government's capacity to meet
income projections and, as a result, on its development plan.
The T.M.P.'s (Tax Modernization Program) (1986–2002) thrust was to increase and maintain
revenue as a percentage of G.D.P. at 24 percent by 1999/2000; expand the tax base; rationalize
the tax structure to make it more equitable; reduce and explain tax rates and tariffs; reduce trade
taxes and increase consumption taxes to support investment; and (Moyi & Ronge, 2006).
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