The proposed income and corporate tax cuts aimed at protecting the economy against the effects of the coronavirus pandemic will cost the Kenya Revenue Authority (KRA) Sh1.3 billion daily over the next three months, Parliament’s budget office has warned.
The Parliamentary Budget Office (PBO) — the unit which advises lawmakers on financial, budgetary and economic matters — said revenue collection will drop by Sh122.2 billion between April and June if lawmakers adopt the tax cuts.
Parliament was to convene yesterday to debate the proposals but the debate was put off over coronavirus fears.
Now, the budget office has warned that the lower revenue collection will compromise the State’s ability to deal with emergencies given that civil servants’ salaries, debt payments and allocation to counties already eat up 94 percent of government revenue.
Government spending on development projects like roads, power plants and water infrastructure will be reduced too, further hurting the economy given that State spending puts money in the pockets of workers as well as private firms linked to infrastructure works.
This will in turn affect suppliers and subcontractors down the value chain.
The reduced revenue will leave little room for maneuvre and with expected revenue underperformance, the country does not have much by way of available resources to cater for emergencies, PBO has said in its report to lawmakers ahead of the debate on Tax Laws (Amendment) Bill 2020.
“National savings are not adequate,” the report warns. “As a result, the country is not financially in a position to offer an elaborate stimulus package as other countries have done.”
About 23 percent of government revenue was already earmarked for repayment of public debt, which has ballooned in recent years, while 71 percent had been allocated for recurrent spending and allocation to counties.
Treasury has reduced Value-Added Tax (VAT) from 16 to 14 percent and has proposed that corporation tax be reduced from 30 to 25 percent under the plans scheduled to come into force this month once approved by Parliament.
The raft of tax changes are geared at lowering the cost of basic goods while providing workers with additional income for spending to boost consumption and sales of traders.
Lower taxes are also expected to increase tax compliance. However, the PBO has advised MPs that the cuts will hurt tax collection, prompting the need for the government to borrow more in what will further add to the already large public debt.
For instance, the PBO says the proposed 100 percent tax relief for workers earnings up to Sh24,000 will leave a Sh19.84 billion hole for the remainder of the financial year until June if the measures, yet to be debated and approved by lawmakers, are backdated to April.
Reduction of pay-as-you-earn (PAYE) tax for top-bracket workers (those earning from Sh57,333 and above) to from 30 to 25 percent will cost the Exchequer another Sh7.08 billion, while reduced corporation tax is estimated at Sh45.69 billion in three months.
The biggest revenue loss will, however, comes from reduced VAT, which was enforced on April 1, setting back State revenues by Sh49.6 billion. Revenue collection is also likely to take a bigger beating should more businesses, especially those in the crucial services sector, shut down as health authorities tighten the sanitary measures to stem the spread of the death-threatening coronavirus.
Already, tourist hotels have closed down while restaurants are operating at below capacity. Airlines like Jambojet have also halted all flights, meaning that taxes from ticket sales in the industry will generally decline.
Restrictions imposed on businesses like schools and colleges, retail outlets and entertainment spots will also hurt sales as well as jobs and further erode opportunities for tax collections.
The Markit Stanbic Bank Kenya Purchasing Managers’ Index (PMI) for manufacturing and services fell to 37.5 in March from 49.0 in February. Readings above 50.0 signals growth in business.
Kenya’s readings already indicate that businesses are not doing well, meaning that the readings for April are likely to be much lower compared to March.
“Kenyan firms saw a marked drop in business activity during the month, which was widely linked to the impact of the Covid-19 pandemic on consumer demand,” the Stanbic said in its report.
‘’Businesses consequently reduced activity and employment, while demand for inputs fell at the quickest pace since late-2017.” The budget office has already indicated that slugging tax collections has made it difficult for the State to unveil an expenditure-driven stimulus package akin to bailouts in the developed world, including offering a financial package to struggling business and workers being laid off due to the pandemic that has left 1.3 million people infected and over 77,000 dead.
On the brighter side, over 294,000 have recovered after being infected, signaling optimism that the pandemic can be contained.
To mitigate against the adverse effects of the virus in Kenya, the budget office has asked the Treasury to borrow Sh150 billion to offer emergency bailouts to the hardest-hit sectors such as aviation, tourism and horticulture as well as offer social support to the poor and vulnerable.
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