Post date: Wed, May 14, 2025
Category: Public Sector EmploymentPublic Sector Reforms
By: Kwame Owino,

Kenya’s government continues with its difficult job of trying to maintaining fiscal solvency, a problem which its core officers describe as liquidity problems. The efficiency and management competence of the tax administration agency, Kenya Revenue Authority (KRA) is also in focus.

This gated article in the Business Daily confirms  that the Director General of the Kenya Revenue Authority announced staff changes. What leaves one aghast was the idea that 474 officers, representing 74% of staff in the department responsible for refunds of Value Added Tax were reassigned to new roles after their employer detected collusion in the administration of refunds for VAT.

In detailed reporting, the title of the article mentions a purge, suggesting expulsions but upon reading, it emerges that the change referred to hardly qualifies as a purge but a redeployment of staff to other departments. Those changes were made necessary after an audit revealed collusion between some staff and firms in order to process illegal requests for refund of VAT. Relative to the gravity of the findings, the reshuffling of staff appears to be merely symbolic changes.

It is understandable that any mechanism for claim of large tax refunds would create incentives to commit fraud. But the reshuffling is baffling because the audit did not just confirm the risks, but provided an estimate while suggesting collusion with some staff of the KRA.

The audit estimated that the annual losses to the republic from this tax refund scheme at Kshs. 30 billion. Needless to state, tax evasion and collusion in tax fraud are felonies in Kenya’s penal code and tax laws. That estimate represent 4.3% of expected VAT receipts for the present financial year.

What explains the tame response by the KRA to the fact that some of its staff are colluding with firms that commit tax fraud? A tour of the facts through the lens of Public Choice Theory (PBT) reveals a few relevant points.

Risk of Dysfunction

Table 1 shows that in 2024, Kenya’s public sector had more than 1 million people employees and is a large enterprise.  These public sector workers understand that their efforts should improve public welfare, but they also have private interests and apply their effort to fulfilling those economic and political interests. As a result, when a poorly designed system for refund of VAT presents opportunity for self-enrichment, the Public Choice Theory informs us that the collusion is bound to happen.

For the management of the KRA, the resort to a reshuffle demonstrates the realization that those employees placed their private interest above that of their employer’s. Citizens see this response as a mere tap on the wrist.  The employer is constrained from inflicting penalties and more intrusive reforms because the risk of employee resentment could result in more open disruption of services that would damage the reputation of managers.

Given the economic incentives that drove the incentive for collusion, the reshuffle will not create a strong deterrent to both the incumbents and future staff members. It seems that the staff have the ability to limit more radical action by virtue of being insiders even when their behaviour has harmed the public reputation of the KRA on the one side and the political administration that appoints its Board on the other.

Also constrained by the interest in defending its reputation is the board which understand the information in the hands of the officers whose behaviour is in question. The operations of the organization are in the hands of this staff and they may create instability and dysfunction that would ripple across the organization and the entire state.

Thus, the KRA management responds with symbolic changes because the alternative would be to suspend or dismiss staff, with the possible result being sabotage or dysfunction.  This result is an equilibrium of dysfunction.

Added to this the inefficiency in the resolution of cases in Kenyan courts which strengthen the incentive for unethical behaviour. In the mind of the colluding officer, it is possible to resort to court, apply for an injunction and retain one’s job in the hope that the case complexly collapses or the evidence is insufficient to lead to conviction and dismissal. In other words, corrupt and unethical staff members in the public sector benefit from dysfunction within their departments and other departments in the entire public sector.

Executive Encroachment into Tax Legislation

Authority to impose taxes in Kenya is exclusively placed in the hands of legislative organizations at both the National and sub-national levels. Under article 210 9 (1), the Constitution of Kenya states that, ‘No tax or licensing fee may be imposed, waived or varied, except as provided by legislation’.

Despite that, Kenya’s parliament has always demonstrated exceptional deference to the Executive branch of government generally and the National Treasury in particular. As predicted by PBT, the executive branch desires to wield power of economic management through larger budgets and discretion in fiscal policy. The contest for resource management and parliament’s deference results in a fiscal expansion and the repeated introduction of complex and arcane rules in tax administration.

In a variety of legislations, including this Finance Bill 2025 and periodic amendments to the Tax Procedures Act, the executive and its agencies such as the KRA have systematically encroached on tax policy decisions that the constitution neither authorizes nor contemplates. Refunds for VAT have become a fertile area for expanded discretion to tax administration and the Cabinet Secretary for Finance.

Decisions on VAT refunds are subject to the judgement of the staff in the VAT department, creating opportunities for applicants to offer bribes in anticipation of audits or after audits. Complex legislation such as the distinctions between exemption of  VAT on some products and Zero Rating of others as explained in this guide, raises more opportunities for the application of individual discretion by bureaucrats. One result would be collusion to evade taxes or overlooking fraudulent claims.

This basic use of the PBT to explore the deep dysfunction in the public sector and the complexity of Kenyan taxation policy and how these undermine public sector reform leads to a final question.

What Should be done?

As the staff reshuffle at KRA shows, achieving reform within Kenya’s public sector is not possible without contemplating the political consequences. But it requires parliament to understand its role in taxation policy and that its delegation to the executive and its agencies reinforces the equilibrium of dysfunction and imposes higher taxation burden on citizens and firms.

The risk of dysfunction and internal sabotage are inbuilt in the design of the government. Response to that requires parliament and the executive to earn the public trust in order to retain public support whenever sabotage from individual staff or groups of staff who may attempt to hold the state hostage when reforms are being undertaken.

In spite the fact that both the executive and legislative branches of Kenya’s government are highly unpopular, this reform remains necessary. On this question, Kenyan citizens and civil groups are alone. Collective action for a simpler tax code is a starting point.

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