Can e-procurement solve the problem of Kenya’s pending bills and unlock tax compliance? If you are a taxpayer in Kenya, you are likely wondering whether e-procurement can help resolve the issue of pending bills.
You must be familiar with the dreaded wait for payment, especially if you have supplied goods or services to government ministries or institutions.
That long wait often results in pending bills. You deliver a service, you supply goods, you send the invoice, and then … silence… crickets.
What next?
You start the journey or journeys. Reporting to the government offices, as if you were the latest employee. Only that this time, you are chasing your payment. You can do this for years.
Now, when you got that LPO, contract, or tender, you were a great citizen. When it came to payments, however, the story was different. This is the lengthy narrative about government and government procurements.
You have joined a long, frustrating queue of suppliers waiting to be paid by government institutions. This is not just a cash flow problem for businesses. It is a massive national crisis that starves many taxpayer businesses of cash flow and the national treasury of vital tax revenue.
What about the mental health of the suppliers? The taxpayers?
You may have wondered how the government can address a problem that affects not only tax compliance, the economy, and the health of taxpayers, but also their mental well-being. In this article, we will cover some of the issues.
A recent report highlighted a shocking statistic. State-owned corporations, or parastatals, are responsible for a staggering 77 percent of all the pending bills in this country. Does this surprise anyone? You?
This amount of unpaid invoices is not only hurting businesses but also their suppliers. The unpaid invoices are actively crippling tax compliance. This deprives the country of funds for development. The nexus is simple and easy to understand.
For taxpayers to pay taxes, they must operate their businesses. To do this, they need cash. Some of that cash is held in pending bills. What to do?
What if the technology designed to solve the pending bills problem, the E-procurement, could also become Kenya’s most powerful tool for boosting tax compliance and revenue? What are the dots?
The Vicious Cycle of Unpaid Bills and Missed Taxes
To understand this proposed solution, we must first understand the problem. The mountain of pending bills creates a vicious cycle that goes like this:
- A parastatal awards a contract (often through some process prone to delays and anything else) or an LPO.
- A taxpayer supplies goods or services, often using their own capital or taking a loan to finance the order. Some loans are secured using personal property.
- The invoice gets stuck in bureaucratic red tape in the parastatal, deliberate delaying tactics, or simply because the parastatal has inefficient cash flow management systems.
- The taxpayer waits for months, even years, for payment. Without this cash, their business struggles to pay its own suppliers, employees, and most critically, its taxes.
- The tax commissioner (KRA) comes calling for VAT, PAYE, income tax, and excise duty where applicable. The taxpayer has technically earned income, but has not received it.
This is the crux of the matter. How can a business pay taxes on income it has not received? This forced tax non-compliance is not always malicious. It is often a matter of life and death. The business must choose between paying operational expenses, such as salaries, and paying the taxman.
Could E-Procurement be the Solution to Kenya’s Pending Bills Crisis?
This is where e-procurement enters the scene as a game-changer. By digitizing the entire procurement chain, from tendering to payment, the system can address the root causes of pending bills. However, remember that any system is only as good as its users.
How will this be achieved?
a. Transparency and Accountability
Every step in the procurement chain is recorded on a digital platform. This will make it almost impossible to “lose” an invoice or pretend it was not received and on time. The system should automatically track deadlines, prompting officials to take action.
b. Efficiency and Speed
Bureaucracy slows down workflow in any organization, whether it is a government or a private one. With E-procurement, the workflows and approvals will be automated. This automation will slash through bureaucracy. Goods are received, invoices are verified, and payments are processed in a fraction of the time it takes to do it manually.
c. Integrated Payment Systems
Any system must have integration functionality. The National Treasury disburses funds to government ministries and parastatals. Procurement systems in parastatals should be integrated with those of the National Treasury. Modern e-procurement platforms can integrate with many systems.
The integration will ensure that once an invoice is approved, the payment process is initiated automatically, leaving little room for deliberate stalling. By ensuring suppliers are paid on time for their deliveries, the government will not only settle outstanding debts but also prevent new ones from accumulating.
From Timely Payments to Turbocharged Tax Compliance
This is where the magic happens for the taxpayer. Solving the pending bills crisis through E-procurement directly catalyzes tax compliance across all major tax heads. This will make the tax commissioner smile. But how?
1. Boosting VAT and Income Tax Compliance
This is the most direct impact of the e-procurement. When businesses, especially SMEs, finally get paid for their supply to ministries and parastatals that have been pending for many years, on time, the following is likely to happen:
i. Cash to pay taxes
This is the most straightforward yet most powerful shift. The money to settle the taxpayers’ many liabilities, such as VAT and PAYE, and to declare accurate taxable profits for income tax will now be in their bank accounts, not stuck in some government office. If taxpayers cannot pay voluntarily, the tax commissioner can always collect the amount directly from their bank accounts.
ii. Accurate Income Declaration
With a clear, digital record of payment from a government entity, a business can no longer under-report its income. The e-procurement system creates an auditable trail that the tax commissioner can access. This will make it easy to verify VAT, PAYE, domestic Excise duty, and income tax returns.
iii. Voluntary Compliance
The most significant shift is psychological. When the government becomes a prompt, reliable payer, it builds trust with its suppliers. Many businesses are more likely to comply with tax obligations when they perceive the system to be fair and functional. They are no longer forced to choose between being compliant and staying solvent.
2. Enhancing Customs and Excise Duty Collection
The benefits of prompt supplier payments ripple further down the supply chain. Consider a taxpayer that supplies imported spare parts to a parastatal:
To fulfill the order, the taxpayer must first import the goods and pay the requisite customs duty and import VAT at the port of entry.
If the parastatal does not pay the customs duty and import VAT, that initial tax payment becomes a tremendous financial strain later.
With timely payments via the e-procurement system, the supplier is reimbursed the full cost of the import. The reimbursement includes the taxes paid at the time of importation. This will ensure the taxes paid at the point of entry are not in vain. The taxpayer can afford to pay them upfront without fear.
Similarly, for manufacturers supplying excisable goods, timely payment ensures they can meet their excise duty obligations without defaulting.
A Healthier Economy for All
With the E-procurement system, the bigger picture is in the health of the economy, which will benefit all citizens. Clearing the pending bills through a transparent e-procurement system will set off a positive domino effect across the Kenyan economy.
This is how it will happen:
1. Business Growth and Stability
Business certainty is essential in every sector of the economy. Every taxpayer wishes for that certainty. With a working E-Procurement system, taxpayers who transact business with government ministries and parastatals can plan, invest, and hire new staff with confidence. They are sure they will receive full amounts on time. This certainty will foster growth and innovation.
2. Reduced Borrowing
Many taxpayers who have transacted with government ministries and parastatals wait for months before receiving payment. Meanwhile, they must continue to operate. Many procure expensive loans.
With the E-Procurement, they may not need to take out high-interest loans to stay afloat while waiting for the payment. This is expected to improve their profitability, longevity, and tax burden.
3. Increased Tax Revenue
The tax commissioner wins big. Timely payment to suppliers results in increased tax revenue. As more taxpayers become tax compliant and declare higher profits due to settled bills on time, tax collection, such as corporation tax, VAT, and pay-as-you-earn (PAYE) from newly hired employees, is expected to increase significantly.
4. Restored Faith in the System
This might be the most valuable outcome. When businesses transact with a government that pays its bills and a tax system that becomes easier to comply with, it fosters a new era of cooperation and national pride.
Final Thoughts
We all agree that streamlining procurement in government ministries and parastatals is necessary to achieve one key objective: paying supplier debts and collecting more taxes. Kenya’s massive pile of pending bills is more than a debt. It is a broken promise that has stifled business, tax revenue, and the economy for years.
Implementing a robust, transparent e-procurement system is one of the key steps to unlocking this gridlock. This is a classic case of the government needing to efficiently manage its own debits (payments to suppliers) to improve its credits (tax revenue collection) significantly.
By paying what it owes, the government not only settles old debts but also activates a powerful engine of tax compliance and economic growth that benefits every single Kenyan. The pending bills are hindering the country’s financial development.
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