Financial services and ICT sectors continued to control more than half of corporate income taxes (CIT) paid to the Kenya Revenue Authority (KRA) last financial year ended June, pointing to relatively high profitability and compliance levels.
Fresh data from KRA shows the two sectors accounted for about Sh141.2 billion, or 51 percent, of the Sh276.9 billion taxes on corporate earnings.
The financial and insurance sector, largely commercial banks, contributed more than a third (38 percent) of the total corporate income taxes wired to the KRA after remitting about Sh96.9 billion in the review period.
Collections from the Information & Communications sector, where Safaricom is a major contributor, amounted to about Sh44.3 billion, or 16 percent, of the total taxes on profit which are remitted quarterly.
The data shows that service activities overtook manufacturing to become the third largest contributor of corporation taxes after the sector made up 10 percent of the installment taxes, or about Sh27.7 billion.
Companies pay 30 percent of their annual profit as CIT, paid through quarterly installments. The KRA disclosed the top three sectoral contributors for the financial year ended June 2024 which saw most firms decry elevated operating expenses following the enforcement of Finance Act 2023.
Business leaders complained of increased taxation pressures, including doubling of value added tax on fuel to 16 percent and implementation of 1.5 percent housing levy on gross payrolls of employees which is matched by employers, as key drivers of operating costs.
Firms had earlier also complained of a rise in electricity bills and costly raw materials as a result of lingering global supply constraints amid a weakening shilling which piled pressure on input costs.
The manufacturing sector, which was third in CIT contribution the prior year, dropped out of the top three contributors to the corporation taxes in the year ended June 2024.
Goods makers said during the review year that they were forced to take a hit on earnings after failing to pass the entire cost of production onto consumers.
“We should be passing on everything but the end result is that affordability levels then doesn’t allow for people to buy,” Rajul Malde, the commercial director at Pwani Oil, said in an earlier interview. “Therefore, if we did that [pass entire costs to consumers], there would be impact on volumes and that means sales go down and production reduces.”
The inability to pass all additional costs to the consumers left some manufacturers with a significant portion of the expenses, resulting in some of them defaulting on loans, they said.
As a coping mechanism against cost pressures, factories resorted to product re-engineering or modification which involves removing some ingredients from a product while maintaining the same price and reducing the size of products. Other strategies included prioritising export sales and importing cheaper finished goods as opposed to local manufacturing.
“Fiscal policies (taxes) have contributed [to lower profitability]. For example, the Export and Investment Promotion Levy [at the rate of 17.5 percent] has had a huge impact on the increase of imported raw materials and intermediate goods for manufacturing,” the Kenya Association of Manufacturers, a sector lobby, said via email earlier in the year.
“Furthermore, consumers’ purchasing power has been dwindling due to high cost of living making it almost impossible for them to purchase the finished goods. The low demand for manufactured products has reduced manufacturers’ cash flow and impacted the ability of businesses to meet their financial obligations such as debt payments.”
The KRA data shows the share of CIT taxes remitted by financial services and the ICT sector in the review dropped, pointing to a general slowdown in profitability.
The contribution of the financial and insurance sector dropped from 38 percent of total Sh263.8 billion CIT receipts in the year before, translating to a 3.3 percent fall from Sh100.3 billion remitted to KRA in the year ended June 2023.
The taxes paid by companies in the Information & Communication sector, on the other hand, declined 11.60 percent from about Sh50.1 billion in the prior year when the sector’s share was nearly a fifth (19 percent).
President William Ruto, while admitting the decision to enforce taxation measures in Finance Act 2023 was “difficult” and “painful”, maintained that the government’s options in raising revenues were limited.
“The policy measures required to mobilise necessary revenues have been difficult, but they were our only way and means of escape,” Dr Ruto said in December 2023 when the country marked 60 years of independence.
The tough operating environment prompted the majority of firms to freeze investment in new branches, expand production capacity, and launch new product ranges last year, an analysis of monthly findings of Stanbic Bank’s Purchasing Managers Index (PMI) during the review year suggested.
