Treasury raises income tax target by Sh36 billion

The Treasury has raised this year’s tax collection targets from company and employee earnings by Sh36.1 billion after President Uhuru Kenyatta announced the Covid-19 tax reliefs will end in January 2021.

The latest revenue outlook report by Treasury Cabinet Secretary Ukur Yatani shows that income tax receipts are projected to hit Sh735.5 billion, a marginal climb from an earlier forecast of Sh699.4 billion in September.

This is the second time in just over a month that the Treasury has upgraded its target for income tax —largely deducted from corporate profit and workers’ pay — having raised it by Sh14.4 billion in September after Covid-19 restrictions were eased further.

The latest upward review means the Kenya Revenue Authority (KRA) is now expected to collect Sh50.5 billion more on earnings by businesses and individuals than the Sh685 billion that had been budgeted in June.

“The income tax stream has been adjusted upwards by Sh50.5 billion, signalling a reversal of the current tax relief measures within the fiscal year,” Churchill Ogutu, the head of research at Genghis Capital, wrote in a note.

Workers and resident companies are presently paying a maximum tax at the rate of 25 percent of their earnings instead of 30 percent as part of a tax holiday package passed by lawmakers late April to cushion businesses and families from the economic shocks of the pandemic.

Employees earning up to Sh24,000 were spared payroll tax deductions, personal relief for all workers was raised to Sh2,400 from the initial Sh1,400 while turnover tax for small traders was lowered to 1.0 percent from 3.0 percent.

The reliefs included a cut on value added tax (VAT) rate on purchase of goods and services since April to 14 percent from the standard 16 percent.

The income tax reliefs and holidays were aimed at giving workers additional income to spur consumption and lift flagging sales by businesses, while reduced VAT rate was aimed at lowering the cost of basic items.

The latest review in the final Budget Review and Outlook Paper (BROP) has seen the Treasury also lower the forecast drop in excise duty to Sh32.6 billion from Sh45.8 billion in September compared with what had been budgeted in June after bars were re-opened.

The taxman is now expected to collect Sh208.8 billion from excise duty—largely driven by taxes on alcohol and cigarettes—from Sh195.6 billion in early September, but still lower than the Sh241.4 billion target set in June.

The target in import duty has also been raised to Sh96.3 billion from Sh84.4 billion on gradual recovery in international trade, but still shy of the initial Sh106.8 billion.

Mr Yatani, however, expects expenditure on goods and services to remain more depressed than earlier projected in June. He has, as a result, further lowered the VAT target to Sh437.6 billion from Sh444.4 billion early September and Sh481.6 billion in June.

Overall, the target for ordinary revenue — which includes non-tax streams such as court fines, charges for use of government services, grants, rent of buildings and forfeitures — has been raised to Sh1.6 trillion from Sh1.52 trillion in September.

The projected ordinary revenue is, however, still lower by Sh32.26 billion compared with Sh1.63 trillion that had been forecast in June because of a shortfall of Sh131.2 billion in the last financial year ended June 2020.

Mr Yatani has blamed the underperformance on “the impact of the containment measures against Covid-19 pandemic on economic activities and the tax relief measures implemented to cushion Kenyans against the adverse impact of the pandemic and to increase liquidity in the economy”.