Drop in disposable income cuts VAT collections to 12-year low
Official statistics show the KRA suffered a 1.11 percent fall in VAT receipts for the first time, since it started enforcing International Monetary Fund-led reforms more than a decade ago.
Value-added tax (VAT) collections have fallen behind deductions on pay to workers, for the first quarter of the current financial year, in a rare development signalling the impact of a decline in disposable income owing to a tough economy.
Official statistics show the Kenya Revenue Authority (KRA) suffered a 1.11 percent fall in VAT receipts for the first time, since it started enforcing International Monetary Fund-led reforms more than a decade ago.
This is after the taxman received Sh151.33 billion between July and September 2023, compared with Sh153.03 billion in a similar period last year.
The rare contraction in VAT, charged on consumption of goods and services along the supply chain, is a reflection of eroded purchasing power on the back of increased pay slip deductions and elevated borrowing costs.
During the review quarter, collections from earnings by individuals — salaries and wages, as well as proceeds from disposal of assets — jumped 24 percent to Sh152.58 billion, bucking a trend where they have fallen behind the VAT receipts in recent years.
“A typical employee has to part with significant taxes on one hand and high loan obligations on the other. This means his purchasing power is quite weak,” Ken Gichinga, chief economist at Mentoria Economics, said in a recent interview.
“In a period of high unemployment, you will find that the same employee is supporting a number of other persons within and beyond his/her family. All these things coming together means that aggregate demand for goods and services is very low and businesses are feeling this through lower revenue.”
Increased payroll deductions such as affordable housing levy and Social Health Insurance Fund, have significantly cut the take-home earnings for workers, slashing their purchasing power.
Reduced disposable income has, in turn, hurt demand for goods and services with most businesses and households prioritising expenditure on basic needs.
This has seen cumulative deductions account for between 40 and 45 percent of gross pay on average, according to estimates by the Federation of Kenya Employers (FKE).
The contraction in VAT receipts came despite the rollout of the electronic Tax Invoice Management System (eTIMS) last financial year.
The KRA has banked on the rollout of Internet-enabled electronic tax registers, which give it a real-time view of sales, to make VAT the biggest driver of new taxes.
“As it is now, if there’s one tax head that every single person is paying is VAT. Even to a small child on products that are not exempt [VAT is applicable]. Everybody is incurring VAT,” KRA acting commissioner-general Rispah Simiyu said in a past engagement.
“Why then shouldn’t it be the tax head that performs the best? That remains a challenge to us… and it is a challenge that we are taking graciously.”
Businesses endured weak sales in the review period, according to findings of the monthly Stanbic Kenya Purchasing Managers Index (PMI).
That was on the back of a decline of money in circulation, amidst a softening economic setting, which was exacerbated by the uncertainty that followed political instability as a result of deadly youth-led protests against new taxes and bad governance.
The exacerbated economic uncertainty resulted in consumers delaying spending decisions, hurting sales and prompting companies to slow down output.
