The taxman has expressed pessimism about future revenue performance in the face of a dip in earnings by corporates and main sector contributors.
The Kenya Revenue Authority says the harsh economic times have presented a bleak future for its revenue target of Sh2.8 trillion.
For the tax agency, the economy has adversely affected one of its mainstays – corporation tax.
KRA is further alarmed that the manufacturing, construction, and financial sectors are struggling yet they are the main revenue contributors.
“This is where the bulk of revenue comes from…look at the contribution of GDP from those sectors is quite huge,” Alex Mwangi, KRA commissioner for Strategy, Innovation, and Risk Management told the Star in a wide-ranging interview on Monday.
The acting KRA commissioner said the situation, for instance, of profit from banks declining by 4.9 per cent - from January to September - is alarming.
“When we see banks reporting losses, we are worried, more so since those externalities are beyond KRA,” he said.
Mwangi asserted that, “Corporation tax comes from the profits so if banks are reporting losses, we expect reduced tax.”
Last month, Equity Bank posted a 20 per cent drop in net profits to record Sh19.34 billion.
Safaricom reported losses for the half year, the same attributed to depressed consumer spending.
“Corporation tax is tied to profits. The decline of 3.1 per cent is because the banks are reporting losses,” Mwangi said.
KRA collected Sh263.8 billion in corporation tax in the financial year 2022-23, which was a growth of nine per cent from the previous year.
Corporation tax amounted to Sh86.6 billion from July to November in the fiscal year 2022-23, but is currently Sh83.9 billion, translating to a drop of 3.1 per cent.
Data seen by the Star shows a drastic drop in corporation tax from the construction sector at 47 per cent, 20.6 per cent for the ICT sector, 45 per cent in the manufacturing sector, and 11 per cent in professional and technical activities.
“When we see a decline of 3.1 per cent, that is a big challenge in our bid to achieve the target of growing revenue by 28 per cent,” Mwangi said.
KRA is concerned about a drastic reduction in the importation of non-containerised cargo such as rice, iron, steel, and clinker cement.
“The construction sector seems to be affected by the harsh economic environment. We have seen a reduction in terms of importation of those commodities,” Mwangi said.
“It is tied. If you have issues with the importation of clinker, cement, iron, steel, it affects the construction sector…that is where we have the highest decline of VAT.”
In the ensuing scenario, KRA says there is nothing much to take home in terms of corporation tax, VAT, and withholding tax.
“We are recording growth in the withholding tax from the private sector and a decline in the same from the public sector. It is all tied,” the KRA commissioner explained.
Concerns are also rife that key sectors are reducing their employees hence affecting Pay as You Earn.
“PAYE is being driven by policy measures but is losing on the side of SMES reducing their revenues,” he said.
There have also been reports of reduced beer and cigarette consumption with instances of companies downsizing to mitigate unbearable operational costs.
“Manufacturing also brings a lot of revenue, cutting across from corporation tax and VAT. This is where we have had the biggest hit in terms of revenue performance,” Mwangi said.
He spoke at a time when KRA hit the one trillion-shilling mark in revenue collection this financial year.
KRA reported that it had collected Sh963 billion in the first five months of the fiscal year compared to Sh856 billion in the same period last year.
The collections translated to Sh107.1 billion way above last year’s – or about 12.5 per cent, with December already reporting additional billions.
“Given that we collect more revenue in the second half of the year, this is a sign of better things ahead in terms of revenue collection,” Mwangi said.
Despite the leap in revenue earnings, the taxman is unsettled by the poor performance of key economic indicators.
Part of the worry is that the purchasing managers index has sustained below 50 points since February 2023.
The taxman is worried that the dip in PMI implies low performance in the private sector – manufacturing, agriculture, mining, service, construction, and retail sectors.
Excise manufacturers - bottled water, beer, wines and spirits, and sugar, have been hit hard.
“The PMI has been at 47 per cent. This shows how the private sector activities have been severely affected by the current economic environment,” Mwangi said.
The Budget Policy Statement 2023 had projected the economy to grow by 6.1 per cent, but the same has been revised downwards to 5.4 per cent.
The ever-increasing price of fuel is also argued to have affected revenue negatively, in the face of high pump prices pushing more Kenyans back to PSVs to get to work.
KRA also feels the central bank rate and lending rate have led to low borrowing, “affecting consumer spending and investment capacity.”
“Reduced spending and investment by firms lead to a reduction in revenue due to reduced business activities in capital-intensive sectors,” a paper seen by the Star the taxman is reviewing states.
Also on the table is a concern that the Kenya shilling has continued to lose value against major world currencies, thereby increasing the cost of living and reducing purchasing power.
“This, coupled with increasing prices of key products like oil has an effect of driving down import demand,” KRA said in a statement released Monday.
In the list of worries is that the Nairobi Securities Exchange share index has been on a continuous decline, the same attributed to the high outflow of investors from Kenya.
“Increased cost of doing business has also led to firms cutting down on expenditure through layoffs and tax planning by hiring staff on contract basis,” the paper reads.
But an optimistic Mwangi stated that the authority would put in place more measures to be able to generate more revenue.
“With VAT growing at 20 per cent, it means the authority is putting measures that are able to mobilize revenue administratively,” he said.
“As a revenue authority we are putting in place measures that will improve revenue collection even when the economy is not performing as expected.”
In a brief on revenue performance, KRA posted more revenues by 23 per cent in October and 15 per cent in November compared with last year.
“The main reason we performed below expectation was because there was a court case against the Finance Act, 2023,” KRA said.
As a way out of the revenue shortage fears, KRA is looking at the full rollout of eTIMS from January to shore up gains in VAT collections.
“We have started rolling out eTIMS from February. From January, we expect that end-to-end transactions are supported by eTIMS. This would not only improve VAT but also income tax,” Mwangi said.
KRA has also implemented a tax amnesty, generating Sh7 billion in two months and reaching payment plan of Sh11 billion, from a target of Sh50 billion this year.
KRA data further shows that fuel tax collection also grew by 7.3 per cent to Sh127 billion during the period, with more recorded in October and November.
The taxman adds that the revenue assistants it deployed across the country have helped grow taxpayer compliance, adding that steps such as real-time collection of taxes – such as betting taxes, have helped changed times for the better.