By CPA Julian Njoroge Maina
Potentials, Constraints, and Solutions
Information technology is the future of tax administration. In the current fast-paced business world, the vast majority of high-performing tax administrators are using digital technology to track their transactions in real time. The Kenya Revenue Authority (KRA) is no different, as the tax authority is adopting the latest technologies, including the iTax system and the electronic tax invoice management system (eTIMS), to increase revenue, cut operating costs, and improve core functions. In addition to digital divide, resistance to change as well as lack of infrastructure are major constraints to seamless implementation of technology solutions in tax administration. It implies that KRA should not only invest in education and training programs but also ensure the involvement of key stakeholders to improve tax compliance and administration. While technology solutions for tax administration are a prerequisite for increased compliance, understanding and addressing potential constraints provide a comprehensive approach to revenue mobilization and collection.
The Benefits
Digital technology offers a whole range of benefits to tax administrators. For instance, technology solutions allow tax authorities to improve revenue performance. In Kenya, sophisticated technologies have created an opportunity for KRA to drive revenue mobilization and sustain revenue growth over time. A KRA’s report shows revenue collection has progressively increased over the past five years from KES 1.58 trillion in the 2018/2019 financial year to KES 2.166 trillion during the 2022/23 financial year, representing a growth of approximately 37 percent over the period. The strong performance is largely attributed to KRA’s commitment to leveraging technology to simplify tax processes and boost trade. For instance, the integration of the iTax system with the eCitizen portal, the Integrated Financial Management Information System (IFMIS), and private entities for payroll taxes has significantly simplified tax processes, expanded revenue base, and revenue. Therefore, the right information technology for tax administration is a necessary driver of revenue and compliance.
Additionally, technology innovations are important as far as cutting administrative costs is concerned. Digital transformation permits the shift from more labour-intensive channels, such as call centres and in-person appointments, to more efficient and cost-friendly platforms like customer service chatbots. Artificial intelligence (AI) powered automated conversations provide global 24/7 support at the most convenient moment for taxpayers. KRA uses chatbots to provide support to individuals who might need assistance beyond the regular business hours. With the technology solution, taxpayers can obtain information on their own. This reduces tax administration costs for KRA by allowing taxpayers to complete simple transactions more efficiently and comply with the tax code. The suggestion here is that information technology for tax administration is at the core of enhancing tax compliance.
In addition, advanced technology solutions create a chance for tax administrators to improve such core functions as identifying tax base, monitoring, and facilitating compliance. By leveraging the power of technology, tax authorities are increasingly digitizing registration of taxpayers and using third-party data to expand tax base. Equally important, modern data analytic tools enable tax administrators to monitor and increase compliance on an ongoing basis. For example, KRA is seeking to utilize data analytics to mine data from third parties, especially through the eCitizen platform, to monitor tax compliance. Furthermore, technology solutions, including the KRA M-service app and electronic filing, boost customer experience and facilitate compliance by allowing taxpayers transact remotely. It suggests that digital technology equips tax authorities to improve key functions.
The Challenges
While the adoption of digital technology in tax administration has tangible benefits, the strategic direction also has a number of challenges. A significant portion of taxpayers lack access to such technological tools, as internet connectivity and smartphones. This digital divide is not only a major barrier to the acceptance of digital tax services, but also a threat to tax compliance. Moreover, many taxpayers do not have the digital skills and knowledge necessary to use technologies in an effective manner. For instance, taxpayers who experience difficulties using the internet face additional challenges when accessing online services. For this reason, tax administrators need to continue using manual systems while developing innovative ways to bridge the digital divide.
Resistance to change is another factor that impedes the usage of digital technology in tax administration. Tax officials and taxpayers may oppose the introduction of technology solutions because of such factors as high initial costs, lack of training, and awareness. Taxpayers often fail to adopt a new technology if the costs are far beyond reach. Qualitative evidence from Kenya indicates high costs of the electronic tax registers (ETRs) may have hindered many taxpayers from using technology. In addition, tax administrators may have a disincentive to adopting innovative technologies because of the discretionary benefits associated with manual systems. The reason is that modern technologies have the potential to seal corruption loopholes in tax administration. It implies that resistance to technology serious challenge to using information technology for tax administration.
What is more, lack of infrastructure is a technology limitation that affects tax administration. Even the most user-friendly technology solutions will fail in the absence of such basic infrastructure as power and a stable internet connection. Inadequate infrastructure can undermine efforts to achieve equity and inclusivity in tax administration, as the smaller, rural, and less-educated taxpayers are most likely to lack critical infrastructure. Additionally, poor technology infrastructure is an impediment to tax education, as tax officials cannot provide education to taxpayers who do not have access to the needed resources. As a result, tax authorities need to understand and address these constraints to improve tax administration.
Tax administrators can and should use several strategies to maximize the benefits and reduce the limitations of information technology in tax administration. For example, they should enlist support of key stakeholders to minimize resistance to change and increase compliance. In other words, tax authorities should conduct comprehensive stakeholder analysis in order to identify such key factors as expectations of digital transformation and demographics of the taxpayers. Equally important, taxpayer education can help onboard many individuals to information technology for tax administration. Tax administrators should establish effective education and training programmes to make sure taxpayers can use digital tax solutions. Since digital transformation is an unending process, tax administrators should embrace an ongoing approach to implementing information technology to leverage new opportunities. The adoption of digital technology for tax administration has a wide range of benefits, albeit the strategic approach has its fair share of constraints. Technology solutions create a chance for tax authorities not only to boost revenue performance, but also cut administrative costs and improve core functions. However, tax administrators often face myriad digital transformation challenges, including resistance to change and digital divide, which hinder effective use of information technology for tax administration. Going forward, tax authorities should both enlist support of major stakeholders and invest in effective education and training programs to minimize resistance and increase compliance. While integration of information technology for tax administration brings tangible benefits, tax authorities must address the constraints to promote inclusivity in implementation.
