Cost of loans set to go up after KRA misses tax target
The Kenya Revenue headquarters in Nairobi. The tax authority has fallen short of revenue collection for the three months ending September 30. Photo/SALATON NJAU
What you need to know:
The deficit could cause domestic borrowing, which was originally targeted at Sh106.7 billion, to escalate with adverse consequences on interest rates just when they were beginning to decline.
The shortfall could also tempt the government to bring forward the floatation of the Sh85 billion ($1 billion) sovereign bond that was tentatively scheduled for the fiscal year starting July 2013.
The single largest item whose collections fell behind target was value added tax (VAT), where over Sh13 billion was not realised in the first quarter despite being included in the 2012-13 Budget.
The private sector could be squeezed further from credit by an increase in State borrowing prompted by a Sh45 billion revenue shortfall in the three months ended September 30.
The deficit could cause domestic borrowing, which was originally targeted at Sh106.7 billion, to escalate with adverse consequences on interest rates just when they were beginning to decline.
“You can expect that with this kind of revenue shortfall, the government will be tempted to borrow,” said Tony Orwochi, a research officer at the Kenya Debt Relief Network.
This would starve the private sector of credit, making borrowing more expensive.
“It would raise the level of debt, taking away money that is meant for critical sectors of the economy,” said Mr Orwochi.
The extra borrowing in the course of the 2011/12 fiscal year raised total debt to nearly Sh1.8 trillion, about half of Kenya’s total annual production. Interest expenses on the debt are expected to hit Sh300 billion by the end of this financial year.
The shortfall could also tempt the government to bring forward the floatation of the Sh85 billion ($1 billion) sovereign bond that was tentatively scheduled for the fiscal year starting July 2013.
When it became difficult to raise funds in the last financial year, the government resorted to a syndicated loan from a group of international commercial banks.
The single largest item whose collections fell behind target was value added tax (VAT), where over Sh13 billion was not realised in the first quarter despite being included in the 2012-13 Budget.
The total revenue shortfall was Sh45.2 billion at the end of the first quarter of the financial year, with taxes alone contributing Sh31.7 billion of the amount.
The total shortfall is equivalent to the combined allocations for the Vice-President’s office and Home Affairs Ministry as well as the Planning and National Development Ministry.
It is also equivalent to the entire allocation for the Ministry of Medical Services which is charged with, among other things, provision of medicine.
According to a document prepared by the director of economic affairs at the Treasury, Justus Nyamunga, revenue shortfalls and expenditure pressures persist.
“First Quarter of 2012/13 (in fiscal terms) was generally satisfactory but revenue shortfall and expenditure pressures persist,” said Mr Nyamunga.
He proposed that the Kenya Revenue Authority (KRA) speed up and intensify the audit of large taxpayers whose annual turnover exceeds Sh750 million.
Finance minister Njeru Githae has already ordered KRA to audit large taxpayers following their slow remittances of VAT to the authority.
Mr Githae said the Treasury was now considering re-introducing the rule on withholding VAT to increase collections. The rule became inapplicable from July 1 last year.
“Many large organisations have failed to pay the full VAT after the withholding tax was removed and we need to find who these are,” said Mr Githae in response to a query from the Business Daily recently.
Concerns on VAT collections began after the end of the 2011/12 fiscal year when it emerged that they had only grown by 6.7 per cent compared to 21.1 per cent in the previous year.
The fall in ordinary revenues from VAT came after the Treasury removed the withholding regime so that organisations no longer had to surrender cash and then reclaim it from KRA.
This was intended to reduce the amount of VAT refund claims resulting from the traditional method where agents were supposed to withhold and remit it to KRA.
The minister said VAT ought to be the largest single source of revenue as is the case in many countries. In Kenya it has tended to lag behind income tax.
In the financial year ended June 2012, VAT was Sh183.4 billion compared to Sh171.9 billion in the previous year. It was off target by Sh10.4 billion, the largest shortfall compared to other major sources of tax including income, imports and transport.
Tax experts, however, warn that the withholding VAT regime would only increase the backlog of refund claims and be only temporary because the refunds would eventually have to be paid.
In the analysis, Mr Nyamunga advised that KRA implements an effective excise tax management system, profile taxpayers under customs for risk and speedily implement reforms for collections of other forms of tax such as that on rental income.
The second major difference between the actual collections and target amounting to Sh6.55 billion was in pay-as-you-earn (PAYE).
The lower PAYE collection could reflect the slowdown in the economy in the first half of the year when gross domestic product grew by only 3.4 per cent compared to 4.5 per cent in the corresponding period last year.
The Treasury recently marginally revised the GDP growth expectation for this year downwards to 5.1 per cent from the previous forecast of 5.2 per cent.
During the first quarter of the 2012-13 financial year, import duty fell below target by Sh3.04 billion, excise tax by Sh2.43 billion, traffic revenue by Sh83 million and investment revenue by Sh430 million.
