Tax collections in August suffered a rare drop on the back of depressed sales at the height of economic uncertainties that followed deadly anti-government protests, Treasury data shows.
The Kenya Revenue Authority (KRA) received Sh153.33 billion in taxes in the review month, a Sh9.19 billion, or 5.65 percent, fall compared with a year earlier.
The drop, a rare one excluding the Covid-19 pandemic period when the government extended tax breaks to households and businesses, is partly a reflection of a sharp slump in sales in July when sustained protests shook the Ruto government.
The resultant political tensions plunged the economy into uncertainty with buyers of goods and services reluctant to spend, while firms were cautious about opening their business during the days of protests.
That hurt money circulation in the economy, pushing business deals to the lowest levels not seen since the country battled countrywide partial shutdowns to contain second-round of Covid infections in April 2021, according to findings of a closely watched survey.
“The deterioration in business conditions was due to rapid reductions in both output and new orders, in turn largely reflecting disruption caused by protests and political instability,” analysts at Stanbic Bank and American analytics firm, S&P Global, wrote in the Purchasing Managers Index (PMI) report for July.
“A lack of money in circulation and cost of living pressures also contributed to declines in demand and business activity.”
The impact on State revenues, at a time when a plan for fresh and higher taxation had been frozen, was considerable, Treasury data shows.
This is because value-added tax (VAT) and the bulk of excise duty for July were remitted by the legal deadline on August 20, while payroll deductions were wired to the taxman by August 9.
Save for brewers and distillers of alcohol which remit excise duties a day after moving goods from the stockroom and gambling firms which remit withheld taxes on stakes and winnings within the day, most sectors pay consumption taxes by the 20th of the following month.
The Treasury data shows the tax receipts for the first two months of the current fiscal year (July and August) — which largely reflect the economic situation at the height of the youth-led protests in July and July — dropped a modest Sh4.74 billion, or 1.49 percent, to Sh312.84 billion compared with the prior year.
Though marginal, it was the first drop in taxes since the Covid-19 period in 2020 when most businesses were shut down and the Treasury offered a myriad of reliefs and breaks to assuage pandemic-induced drop in earnings.
The impact of the anti-State demos against the collapsed tax bill, poor governance, and embedded corruption in the public sector on taxes was, however, softer in July.
This was after the demonstrations, largely organised on social media, peaked on June 25 when consumption and payroll taxes had been remitted.
The fall of Finance Bill 2024 has left Treasury and KRA betting on an aggressive clampdown on tax cheats and widening of the tax net to tap the growing informal sector to cut reliance on hikes targeting the formal sector to grow revenue collections.
“In order to enhance revenue mobilisation, the government shall implement a combination of tax policy and administration reforms,” the Treasury wrote in the draft 2024 Budget Review and Outlook Paper (BROP) this week.
“The reforms include strengthening tax administration for enhanced compliance through expansion of the tax base, minimising tax expenditures, leveraging on technology to revolutionize tax processes, sealing revenue loopholes, and enhancing the efficiency of the tax system.”
The collapse of the Finance Bill has forced the Treasury to cut the tax revenue target by about Sh270.15 billion to Sh2.39 trillion.
The Treasury has additionally raised the target for borrowing by an initial Sh172.19 billion to Sh1 trillion and cut the budget by Sh145 billion in a bid to fill the estimated Sh344.3 billion hole left after the tax bill fell.
