Revised tax targets signal hiring freeze

The Treasury has signalled a continuation of job cuts, hiring freezes and pay increase restrictions over the next year after it lowered income tax collection targets by Sh76.2 billion on the back of sluggish corporate earnings.

The Kenya Revenue Authority (KRA) was expected to collect Sh884.4 billion in tax from company profits and workers’ salaries, but the target has been lowered by 8.62 percent to Sh808.2 billion barely three months into the new financial year which started on July 1.

The cuts are contained in a Budget outlook paper released last week, and points to the extension of reduced sales and profits in corporate Kenya that has persisted since 2017 when the country went through a bruising General Election and two presidential elections after the first was annulled by the Supreme Court.

Top firms have in recent months put on hold the hiring of new staff in an economy that has also witnessed a string of job losses affecting nearly all sectors.

Reduced profitability in corporate Kenya, which is underlined by a record number of firms listed on the Nairobi bourse issuing profit warnings, has also hurt income tax collections.

Economists opine that the reduction in income tax collections targets is in response to reduced activity in the corporate world, which has triggered a freeze in new investments, sluggish growth in new jobs and near stagnant salaries.

“They (Treasury) are factoring in an environment where targets could be a bit more realistic vis-à-vis economic realities of the private sector,” said Jibran Qureishi, the regional economist for East Africa at Stanbic Bank — which tracks company performance monthly through its Purchasing Managers’ Index (PMI).

“The new tax target is a more realistic picture of the private sector which has been slow to pick up. If you look at employment index (in the PMI) since the beginning of 2017, it’s been quite neutral, meaning it’s not like there has been improvement in new jobs.”

Official data from the Economic Survey 2019 shows that 78,400 new formal jobs were created in 2018 compared to 114,400 in 2017.

This is the slowest pace of formal job growth since 2012 when the economy churned out 75,000.

The data does not capture job cuts and net employment.

Payroll taxes, levied on the monthly income of workers, usually account for more than half of income tax collections, with the bulk of the remainder coming from taxes on earnings by companies, co-operatives and trusts.

This underlines the importance of new jobs and annual pay increases if KRA is to meet its income tax targets in any given year.

Pay As You Earn (PAYE) taxes in the year ended June 30 rose by 12.18 percent to Sh393.36 billion, compared with a year earlier, but fell short of Treasury’s revised target by Sh9.9 billion. KRA attributed the payroll growth to an increase in government workers’ pay.

“PAYE growth was driven by the public sector, which registered a cumulative growth of 8.9 per cent, driven by upscaling of salaries in the education sector,” KRA commissioner-general James Mburu said earlier, an indication of muted jobs and pay growth in the corporate sector.

Some 312,060 teachers got a pay rise at the start of the year that ended June after their employer, the Teachers Service Commission (TSC), implemented the second phase of their collective bargaining agreement at an estimated cost of Sh18 billion.

The trend was not replicated in the private sectors, where companies struggled based on the profit warnings issued by firms listed at the Nairobi Securities Exchange (NSE)— the bellwether of company and economic performance.

More than 15 of the 62 companies listed on the NSE reported net income drops by at least 25 per cent last year compared with 2017.

Several listed firms have either shed jobs or announced layoffs in recent months.

Firms complain that the government takes years to settle bills for goods and services supplied to it.

The government, on the other hand, attributes the delays to below-target revenue collections and pressing expenditures like public debt repayments that gobble half of tax collections.

Experts say a credit squeeze due to a cap on commercial lending rates, in place since late 2016, had also worsened cash flow for companies and small businesses.

“The interest-rate-capping law continues to strangle the private sector and if the law remains in place in its current form, it will only add to the plight of the private sector,” Mr Qureishi said.

Parliament’s Finance Committee last week rejected Treasury’s proposal to repeal the cap on lending rates. A similar proposal was shot down in 2018.

The Treasury has also revised downwards value added tax (VAT) collections by Sh33.3 billion to Sh462.7 billion, while the target for import duty has been trimmed by Sh6.1 billion to Sh129.3 billion.

Collections from excise duty have, however, been revised upwards by Sh24.3 billion to Sh266.5 billion.

Overall, the Treasury has cut its total tax collections (income, VAT, excise and import) target by Sh91.3 billion to nearly Sh1.67 trillion.