Economy

Slow firms recovery denies KRA Sh11bn in corporate taxes

kra

Times Tower in Nairobi, the headquarters of Kenya Revenue Authority. PHOTO | DENNIS ONSONGO | NMG

The taxman has missed the corporate tax target in the first half of the current financial year by Sh10.9 billion, pointing to slower recovery of companies from the Covid-19 pandemic than the Treasury projections.

Taxes on corporate earnings in the review period amounted to Sh186.67 billion against a goal of Sh197.59 billion, according to data published by the Treasury this week.

The receipts by the Kenya Revenue Authority (KRA) from corporations and enterprises in the July-December 2021 period bucked a trend where the other major taxation streams exceeded the goal set by Treasury secretary Ukur Yatani.

Tax consultants have largely attributed the shortfall in quarterly corporate instalments to the high cost of doing business.

“The performance in corporation taxes is a reflection of how businesses are struggling in this economy where the rate of inflation is high and there’s low cash flow. So most companies are not paying corporation tax and are instead using that money to finance operations,” Stephen Waweru, a senior manager for tax services at consultancy and audit firm KPMG, said.

“Also, low uptake of the VTD (voluntary tax disclosure programme) as well the KRA restriction to carry out physical audits due Covid protocols have contributed to a great extent to the low performance of corporation tax.”

Corporation tax — levied at standard 30 percent of earnings for firms incorporated in Kenya and 37.5 percent for those registered abroad — form a major source of revenue for the government, together with Pay As You Earn (PAYE), Value Added Tax (VAT), excise and import duty.

KRA has struggled to grow compliance in corporation taxes over the years.

A 2019 survey by the taxman, for example, suggested that more than 90 percent of 401,306 companies registered for corporation tax failed to pay corporation tax in the year ended June 2019.

At the time, a measly 33,426 companies, or 8.3 percent of those which were eligible for the taxes were found to be compliant.

This despite some 168,428 or 42 percent of the firms filing annual returns at the time, signalling they were active by end of June 2019.

The low levels of compliance helped KRA build up its case for the minimum tax where all firms were from January 2021 required to pay taxes on their earnings at the rate of one percent of gross turnover.

The High Court last September, however, ruled that the process used to change the law was unconstitutional, a decision which has been appealed by the taxman.

The performance of corporation taxes in the review period has gone against a trend where the taxman has generally been outperforming the target set.

For example, payroll taxes surpassed the goal by Sh9.89 billion to Sh219.65 billion, pointing to a resumption in hiring, removal of salary cuts and recalling of workers who were on unpaid leave at the height of the pandemic.

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