OBELL: Use of electronic rental tax will unlock KRA real estate revenue

In the past decade, the global landscape of tax administration has undergone enormous transformation. Digital innovation has played a key role in redefining how revenue authorities operate and engage with taxpayers. In Kenya, the tax agency has not only embraced this global trend but is now at the forefront of revolutionising tax administration through the strategic deployment of technology.

It is evident that the evolving nature of the economy, propelled by digitalisation and a fast-changing technological environment, demands that tax authorities adapt with speed. Tax administrations must be committed to digital transformation to enable them enhance efficiency, seal revenue leakages, expand the tax base and simplify compliance processes for taxpayers.

One of the most significant areas where technology can bring about transformational change is in the real estate sector, which remains a cornerstone of Kenya’s economic development. According to the 2023-24 Real Estate Survey by the Kenya National Bureau of Statistics (KNBS), the real estate sector contributed a remarkable 33.7 per cent growth to the country’s Gross Domestic Product (GDP). This growth is a reflection of Kenya’s expanding population, growing middle class, which has led to increased demand for residential and commercial properties.

Despite the sector’s central role in wealth creation, its contribution to tax base does not match its prospective. The Monthly Rental Income (MRI) tax, which is the main obligation, is yet to realise its full potential. Introduced in 2016, MRI targets landlords earning between Sh288,000 and Sh15 million annually. KRA has made concerted efforts to bring landlords into the tax net, but earlier systems encountered substantial challenges.

For example, over the past three financial years, rental income tax collections remained nominal compared to potential revenue. In the FY 2021-22, MRI collection stood at Sh12.3 billion, rising marginally to Sh13.6 billion in the FY 2022-23, and Sh14.4 billion in the FY 2023-24. However, estimates place the sector’s potential revenue at over Sh100 billion. This indicates that only about 14 per cent of the sector’s potential is being realised, calling for urgent intervention.

To address this challenge and to fully tap into the revenue potential of real estate, the Kenya Revenue Authority (KRA) recently launched the electronic Rental Income Tax System (eRITS), a digital game changer in tax compliance. This platform represents a milestone in the country’s journey towards modern tax administration.

eRITS is designed to be fully integrated with existing rental property management systems, creating a seamless digital ecosystem for rental income tax compliance. For the first time, landlords and property managers will have access to a centralised digital platform where they can compute, file and pay their taxes with ease and transparency.

The system enhances compliance by ensuring taxes paid reflect actual rental income, not a shilling more, not a shilling less. More importantly, this data-driven approach will play a critical role in expanding the tax base, thereby reducing the burden on compliant taxpayers and promoting fairness in tax system.

Further, by making tax compliance process simpler and less burdensome, the system will see more landlords voluntarily fulfil their tax obligations without coercion. eRITS is therefore not just a revenue collection tool, it is a voluntary compliance enabler.

This system will continue to build on previous efforts by KRA, such as the deployment of Revenue Service Assistants (RSAs) and the implementation of the block management strategy, which successfully brought more than 10,000 new landlords into the tax bracket during the 2023-24 financial year.

eRITS is expected to offer landlords not only a tax solution but also a property management platform. This added value will encourage landlords to engage more actively and transparently with KRA while gaining tools to better manage their rental businesses.

Through the National Tax Policy, the country envisions a tax administration system that is fair, inclusive, and driven by integrity. Tax equity can only be achieved when all eligible taxpayers contribute their fair share of taxes. Through eRITS, KRA will create a level playing field, one where every shilling earned through rental income is accounted for and taxed accordingly. This will eliminate incidences where compliant taxpayers carry the burden while many eligible taxpayers remain outside the tax net.

The success of this initiative depends not only on the system itself but also on the collective willingness of property owners to join in this journey. It is imperative that the country continues to adopt and promote systems that support voluntary compliance and minimise the need for enforcement.

As the country forges ahead with the digital transformation agenda, KRA remains committed to building a tax administration system that is agile, data-driven, and citizen-centric. The launch of eRITS is just one part of a broader modernisation strategy that includes integrating artificial intelligence, data analytics, and automation across all our tax regimes.

These innovations are designed not only to improve revenue collection but also to deliver better service to taxpayers, promote transparency and ensure accountability. In a world that is increasingly driven by technology, KRA must leverage every available tool to secure the nation’s fiscal stability and support the government’s development agenda.

The digital transformation of tax administration is no longer a matter of “if” but “how fast.” With eRITS, KRA has taken a bold step towards enhancing tax compliance in the real estate sector. The system is indeed a revolution in the sector’s compliance journey and signals a new era of simplicity, transparency, and fairness in rental income taxation.

Landlords and property stakeholders should therefore embrace this innovation, not just as a tool to support their businesses, but as a means towards their contribution to the national development. As a country, we should consider building a culture of tax compliance, anchored in equity and enabled by technology.

The writer is the commissioner for micro and small taxpayers at the Kenya Revenue Authority