Governors up in arms over KRA tax on county own-source revenue

The Council of Governors (CoG) is protesting the Kenya Revenue Authority (KRA)’s imposition of value-added tax (VAT) on counties’ Own-Source Revenue (OSR).

In a statement on Monday, CoG chairperson Anne Waiguru said the tax authority is overstepping its mandate by demanding VAT on the devolved unit’s revenue sources and attendant interest and penalties.

“We take the greatest exception to these unwarranted demands which are unfounded and undermine the principles of Article 6(2) of the Constitution. Article 209 of the Constitution outlines the taxes and charges to be imposed by either level of government,” said Waiguru.

“We, therefore, find the demands by KRA on imposition of VAT on counties’ OSR unconstitutional and an encroachment on the powers to impose taxes and duties of the counties in contravention to Article 209 (3) and (4) of the Constitution.”

Governors say services provided by counties in the performance of their functions are exempt from VAT as set out in the Fourth Schedule of the Constitution.

“It is on this premise that we find that the KRA has no basis for these demands,” said the CoG chair.

The county bosses maintain that VAT is a consumption tax levied on the value added at each stage of a product's production and distribution, and thus counties’ source revenue does not necessarily correspond with a service provided.

“All finance laws enacted by counties do not load the revenue streams and sources with VAT as contemplated by KRA. Therefore, there is no logic at all for counties to charge VAT on their source revenue or to remit the same to KRA,” Waiguru added.

They have dismissed KRA’s demands as illegal.

“The Council is however open to discussions geared towards reaching an amicable solution on this issue,” they said, adding that if no action is taken to stop KRA from going further with the move, counties will seek legal redress.

County governments are exempt from income tax; however, they are required to register for VAT obligations and account for VAT on the supply of taxable goods and services.

The devolved units are also appointed withholding VAT agents, required to remit withheld VAT to KRA.

Data from the Office of the Controller of Budgets shows that all 47 counties combined have consistently failed to meet their OSR targets in all the financial years since the start of devolution.

A May 2024 report by the Commission on Revenue Allocation (CRA) and the World Bank shows that county governments have the potential to collect up to Ksh.216 billion annually.

In the 2022/2023 fiscal year, counties collected only Ksh.45 billion.

Even so, the Controller of Budget last week reported that twelve counties; Uasin Gishu, Samburu, Isiolo, Kirinyaga, Turkana, Nandi, Vihiga, Meru, Wajir, Narok, Nyeri and Elgeyo-Marakwet- raised more than 75 per cent of their source revenue targets in the first three quarters of the 2023/24 financial year.

This is an improvement from only three counties- Kirinyaga, Vihiga and Kitui for a similar period last year.