The future of tax enforcement should be better targeting, not simply higher thresholds. That is...
When traders close their shops and take to the streets over a customs valuation decision, we should resist the temptation to reduce the debate to the familiar argument of taxpayers versus the taxman. There is a much bigger question at stake. How should Kenya enforce tax compliance without making legitimate enterprise increasingly difficult to sustain?
The controversy surrounding the Kenya Revenue Authority (KRA)’s revised customs benchmark for general consolidated cargo provides an important test. KRA has increased the minimum benchmark for a 40-foot container of general consolidated cargo from Sh2.5 million to Sh3.2 million, a 28 per cent increase. To the tax administrator, this is principally a customs risk-management intervention.
To a small trader, it can be the difference between a profitable shipment and an unviable one; both perspectives deserve to be heard. Let us begin with something that is sometimes lost in the heat of tax debates: KRA has a legitimate enforcement problem.
Undervaluation, under-declaration, misclassification and misdescription of imported goods distort markets. An importer who deliberately declares goods below their true value does not simply deprive the Exchequer of revenue.
That importer also obtains an artificial competitive advantage over the trader who declares correctly, pays the appropriate taxes and prices goods accordingly. Local manufacturers can suffer the same disadvantage when competing against imports whose true values have been understated.
KRA is therefore right to confront customs fraud. Indeed, a credible tax system cannot allow compliance to become a competitive disadvantage. But acknowledging the problem does not automatically validate every solution, and that is where the present debate should begin.
The question is not whether KRA should enforce. It is how KRA has explained that the Sh3.2 million figure is not a flat tax or an automatic valuation imposed on every container. It is a risk-management reference under the simplified customs clearance arrangement. Where the actual value of goods is higher, the higher value must be declared.
Where an importer disputes the benchmark, there are mechanisms through which the goods can be verified and individually assessed.
Technically, that distinction matters. Economically, however, the picture is more complicated. For thousands of small traders, cargo consolidation exists precisely because they cannot individually fill an entire container. They pool shipments because it reduces freight and administrative costs and makes international trade accessible at a smaller scale.
These businesses frequently operate with limited working capital and thin margins. For them, customs is not merely a compliance event. It is part of the economics of the business. A significant increase in the effective cost of clearing goods can affect stock replenishment, pricing, cash flow and ultimately whether the business survives.
This raises the central question: If undervaluation is committed by some traders, should the regulatory response effectively increase the compliance burden across an entire class of traders? That is the debate Kenya should be having.
Tax administration should be more about precision. Modern tax administration is moving toward data, technology and risk-based enforcement. KRA itself has invested significantly in this direction.
That creates an opportunity to rethink the philosophy behind broad benchmarks. If Customs has access to historical import data, product classifications, country-of-origin information, importer profiles, transaction patterns and other risk indicators, then enforcement should progressively become more precise.
A trader with a consistent history of accurate declarations should arguably not present the same risk as an importer repeatedly associated with questionable valuations. A container carrying low-value merchandise should not necessarily present the same valuation risk as one containing high-value electronics. An importer with verifiable commercial invoices, payment records and shipping documentation should be distinguishable from one whose declarations consistently fall outside reasonable commercial parameters.
The future of tax enforcement should therefore be better targeting, not simply higher thresholds. That is not being lenient on tax evasion; it is making enforcement smarter.
There is another issue that deserves greater attention: transparency. Why Sh3.2 million? Why not Sh2.8 million, Sh3 million or Sh3.5 million? What data informed the adjustment? What was the median declared value of comparable consolidated containers over the relevant period?
How significant is the estimated undervaluation gap? What proportion of consolidated cargo has historically been found to be materially undervalued?
If the Sh3.2 million benchmark is supported by robust customs data, publishing the methodology would strengthen KRA’s position considerably.
Tax administration ultimately depends not only on authority, but also on legitimacy. Businesses are more likely to accept difficult policy decisions when they can understand the evidence and methodology behind them. Transparency does not weaken enforcement; rather, it strengthens the social licence to enforce.
KRA has also pointed out that traders who disagree with the simplified arrangement can seek physical verification or deconsolidate their cargo and make individual declarations. Legally and administratively, that may provide an alternative. However, policy must also be tested against commercial reality.
How long does verification take? What additional clearing, storage and handling costs arise? How predictable is the process? Can a small trader afford to have goods sitting at the port or container freight station while a valuation dispute is resolved? Every additional day means increased storage charges, disrupted stock cycles, lost sales and trapped working capital. An alternative that exists on paper but is too expensive or slow to use is not necessarily a meaningful alternative.
KRA should therefore consider establishing an expedited valuation-review mechanism for traders who can produce credible documentation supporting the actual value of their goods. If the documentation withstands scrutiny, clearance should be quick.
If it does not, KRA should enforce decisively. That would protect both revenue and legitimate trade. Kenya must avoid turning taxation into a growth constraint
There is a broader economic issue here. Kenya needs revenue to finance essential public services, including infrastructure, healthcare, education, security and other government services.
Persistent tax leakage cannot simply be tolerated, but Kenya also desperately needs businesses to grow. The small trader importing merchandise today may become tomorrow’s distributor, manufacturer or regional business. Tax policy should therefore do two things simultaneously: make evasion increasingly difficult and make compliance increasingly easy.
When those objectives become confused, we risk creating a system where legitimate businesses experience compliance itself as a penalty. That would be counterproductive.
The best tax systems do not maximise revenue from every transaction at any cost. They broaden the tax base by creating an environment in which businesses can formalise, grow and remain compliant over time. A business that survives, expands, employs people and becomes more profitable will ultimately contribute far more to the Exchequer than one pushed into informality or closure.
The protests over consolidated cargo should therefore not be dismissed merely as traders resisting taxation.
Nor should KRA be portrayed as unreasonable simply for trying to close genuine customs loopholes. The more important question is whether Kenya can build a tax administration system sophisticated enough to distinguish between the taxpayer who cannot comply, the taxpayer who does not understand how to comply, and the taxpayer deliberately choosing not to comply.
Those are three very different problems and should not always attract the same regulatory response. KRA should enforce aggressively against deliberate undervaluation and customs fraud.
But it should equally demonstrate the evidence supporting the Sh3.2 million benchmark, provide efficient mechanisms for genuine traders to prove actual transaction values and increasingly use data to target enforcement at high-risk transactions rather than applying broad assumptions across heterogeneous businesses.
Ultimately, the success of a tax authority should not be measured only by how much revenue it collects. It should also be measured by how much voluntary compliance it creates, how predictable the system becomes, and whether legitimate businesses can continue growing within it.
Kenya does not have to choose between collecting taxes and supporting enterprise; an efficient tax system should be capable of doing both. Perhaps that is the real test presented by the Sh3.2 million debate.
Philip Muema is a tax expert and Managing Partner at Andersen in Kenya.
Unlock a world of exclusive content today!Unlock a world of exclusive content today!
