Tax collection flat at Sh340bn in first quarter

The Kenya Revenue Authority (KRA) posted a flat growth in collections for the first three months of the year, fresh Exchequer statistics show, reflecting a slowdown in business activities and jobs that started even before the Covid-19 pandemic shocks kicked in.

An analysis of government revenue data published by Treasury Secretary Ukur Yatani on Friday shows that total tax receipts in the January to March 2020 period amounted to nearly Sh340.67 billion, largely unchanged from Sh339.27 billion in the same period a year ago.

This is equivalent to Sh1.4 billion, or 0.41 percent, growth over the same period in 2019.

Companies reported a sharp slump in orders during the three-month period, with overall business deals in private sector hitting lowest levels in more than two years, according to a closely watched monthly survey.

The Stanbic Bank Kenya’s Purchasing Managers Index (PMI), a measure of monthly private sector activity, showed that in March, businesses in major sectors of the economy suffered a significant monthly drop in new orders for goods and services.

This was largely because of reduced demand as a result of shocks arising from the Covid-19 global pandemic.

Business conditions deteriorated at the sharpest pace last seen in October 2017 when the economy was similarly running at half-throttle due to tensions emanating from a fallout over the historic repeat presidential poll.

Depressed private sector deals usually reduce corporate profit and hurt job opportunities, leading to reduced corporation and payroll tax payments.

According to the latest PMI, firms have cut down on activities such as production and employment, with demand for inputs declining at the sharpest pace since late-2017.

Treasury data shows the impact on government revenue was felt more in January when tax receipts amounted to Sh118.35 billion compared to Sh124.98 billion in the same in 2019, a 5.60 percent or nearly Sh6.63 billion drop.

The collections by the KRA recovered in February, rising 3.3 percent to Sh97.70 billion compared with the same month in 2019, while tax receipts in March climbed Sh4.91 billion, or 4.1 percent, to Sh124.62 billion year-on-year.

Overall, total tax collections in the first nine months of the current financial year ending in June rose Sh90.69 billion, or 9.77 percent, year-on-year to nearly Sh1.12 trillion against a full-year target of Sh1.7 trillion, the Treasury data shows.

On the other hand, non-tax revenue — comprising cash surrendered by State firms, fines, levies, rent of buildings and forfeitures — stood at Sh95.80 billion against a goal of Sh138.86 billion.

The below-target tax collections are expected to deepen further in coming months after the National Assembly last Wednesday passed the Tax Laws (Amendment) Bill 2020, awaiting President Uhuru Kenyatta’s assent.

The tax concessions in the Bill are aimed at largely cushioning working families and businesses against the economic shocks of the contagious Covid-19.

They include 100 percent tax reliefs for personal earnings of up to Sh24,000, while pay-as-you-earn (PAYE) tax for top-bracket workers (those earning from Sh57,333 and above) and corporate income tax for resident companies will fall to 25 from 30 percent once the Act becomes law.

The other major relief is the reduced general value added tax (VAT), which was enforced on April 1, to 14 from 16 percent.

“Most essential products are either exempted or zero-rated, but what this (the VAT levy cut) is doing is that it’s giving consumers cheaper prices on goods that are subject to VAT which is a good thing because you want people to spend as well,” said Nikhil Hira, a tax consultant and director at law firm Bowmans, in an interview earlier this month.

“To me, the measures are going to be of more use once we have dealt with the virus and it has gone away than while the spread of the virus is going on.”

Mr Yatani had projected that the tax reliefs, announced by Mr Kenyatta on March 25, would leave a Sh172.0 billion hole in the Exchequer per year, a gap that he had proposed to partially fill through introduction of VAT on some essential commodities such as farm inputs, machinery and animal feeds.

The MPs, however, shot down most of the proposed measures to increase taxation on basic commodities and supplies, leaving a deeper hole in the Exchequer.

The legislators further voted to reduce expenditure for this financial year by Sh51.7 billion rather than Sh74.4 billion that had been proposed by the Treasury, further widening the financing gap.

“We note that the twin combination of amendments on the Tax Bill which will derail revenue target and the narrow reduction in Supplementary II Estimates, complicates Treasury’s revenue arithmetic,” Churchill Ogutu, head of research at Genghis Capital, wrote in a note.

Reduced business activity as a result of the Covid-19 pandemic-induced partial trade and travel restrictions will deplete tax revenue further, compounding the losses as a result of reduced tax collection from workers and businesses. Consumption taxes are also expected to dip.