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VAT half-year collections fall for first time since pandemic on tough economy
The decline in VAT collections was largely responsible for the Sh93.2 billion shortfall in the ordinary revenue target for the first six months of the 2024/25 fiscal year.
Value added tax (VAT) collections fell by 4.3 percent in the six months to December 2024, new data shows, the first such decline since the pandemic, reflecting the impact of subdued consumption in a tough economy.
Combined local and import VAT collections fell to Sh304.1 billion in the period from Sh317.8 billion at the same time in 2023, according to new data from the National Treasury.
The tough economy has been compounded by lower personal and household incomes due to increased pay slip deductions, including higher payments to the National Hospital Insurance Fund, now renamed the Social Health Insurance Fund.
The higher pay slip deductions have further reduced workers' take-home pay following an earlier increase in transfers to the National Social Security Fund (NSSF) and the introduction of the housing levy, which was charged at 1.5 percent of gross wages in 2023.
The decline in VAT collections was largely responsible for the Sh93.2 billion shortfall in the ordinary revenue target for the first six months of the 2024/25 fiscal year.
“Ordinary revenue for the period to December 2024 was Sh1.157 trillion against a target of Sh1.251 trillion, translating into a shortfall of Sh93.2 billion,” the National Treasury stated.
“All broad tax categories of ordinary revenue fell short of the respective targets during the review period. VAT recorded the highest shortfall of Sh36.5 billion, income tax recorded a shortfall of Sh28.6 billion, excise duty (Sh13.7 billion) and import duty (Sh6.1 billion).”
VAT revenue last fell in 2020, when consumption was hit by pandemic-related disruptions, including a night-time curfew and the partial closure of restaurants and entertainment venues.
The government at the time responded to the drop in consumption by reducing the VAT rate from 16 to 14 percent as part of a broader strategy to provide relief to businesses and households amid the economic slowdown.
The VAT rate was restored to 16 percent in 2021, ending the relief as the government moved to stabilise its revenue streams and manage a growing fiscal deficit.
Total revenues including ministerial appropriations in aid (A-i-A) were off the mark by Sh107.6 billion in the six months to December 2024 as the appropriations also fell off the mark by Sh14.3 billion having totalled Sh176.9 billion against a target of Sh191.3 billion.
The missed revenue targets have led the National Treasury to forecast a lower collection outcome for the year to June 30.
The tax target (ordinary revenue) has been set down by Sh55.5 billion to Sh2.575 trillion but estimates on ministerial appropriations have been bumped to Sh484.3 billion from Sh428.6 billion.
The National Treasury expects the revenue trend to reverse in the coming months as economic activities pick up.
The exchequer has been forced to raise its domestic borrowing target to compensate for the ceiling on revenues and an expected shortfall in the next external financing in the fiscal year running to June 30, 2025.
The ordinary revenue target for the 2025/26 financial year has also been set down to Sh2.835 trillion from a previous estimate of Sh3.018 trillion.
However, the target for ministerial appropriations for the coming fiscal cycle has been bumped to Sh484.3 billion from Sh428.6 billion.
