Payroll taxes fall Sh52bn as firms reduce pay, staff

Payroll taxes plunged by Sh52.65 billion in the six months to December 2020 as firms stepped up pay cuts in a tough labour market that defied re-opening of the economy.

The Kenya Revenue Authority (KRA) collected Sh152.62 billion in Pay As You Earn (PAYE) In July-December 2020 period compared with Sh205.27 billion a year earlier, data published by the National Treasury show.

The 25.65 percent drop in PAYE receipts — the first contraction in more than a decade — pushed the collections from monthly workers’ pay to the lowest levels since Sh144.07 billion in a similar period ended December 2016.

The drop in taxes also came in a period when the Treasury offered reduction in maximum income tax rate to 25 from 30 percent between May and December 2020 and cushioned workers earning a monthly pay of up to Sh24,000 from taxation.

The taxman, as a result, missed the half-year target in PAYE receipts by Sh28.91 billion, with collections accounting for 40.48 percent of the Sh376.99 billion full-year goal.

“The decline is largely attributed to the difficult operating environment due to the Covid-19 pandemic which has adversely affected revenue performance as from March 2020,” the Treasury officials wrote in the review report.

The Covid-19 containment measures such as a night curfew, enforced on March 25 last year, saw companies scale down operating hours, which in turn exacerbated drop in sales.

That prompted firms to cut workforce, slash salaries and adopt unpaid leave policies in a bid to contain costs amid depressed earnings.

While private firms brought to an end an eight-month job shedding streak last October, they have since stepped up pay cuts and lower salary offers for new recruits, according to a monthly survey which polls corporate managers in key sectors such as manufacturing, services and agriculture.

“Kenyan firms continued to lower employee wages in February, as survey data indicated a fourth successive monthly decline in salary costs,” composers of Stanbic Bank Kenya’s Purchasing Managers Index (PMI) wrote in the February report on March 3. “Moreover, the rate of reduction accelerated to the fastest since July last year.”

The collections from workers’ pay was further hurt by reduction in maximum tax rate to 25 from 30 percent between May and December 2020 and removal of the tax for workers earning a monthly pay of up to Sh24,000.

The Treasury has since reinstated payroll tax rates to pre-Covid period levels except for those earning a maximum of Sh24,000.