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Treasury’s income tax target revision unrealistic, say analysts

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The National Treasury building in Nairobi. FILE PHOTO | NMG

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Summary

  • The National Treasury has revised upwards the Pay As You Earn (PAYE) revenue target by Sh140.6 billion, banking on the reinstatement of the PAYE tax rate to 30 percent from 25 percent, effective from January 1.
  • As a result, the target for the fiscal year ending June 2021 has gone up to Sh376.9 billion.
  • Analysts at Genghis Capital, however maintain that this target may not be achieved due to the negative impact of the pandemic on the labour market.

The Treasury’s upward revision of the expected revenue from individual income tax for the fiscal year is unrealistic owing to the coronavirus crisis hit on monthly wages and jobs, analysts have said.

The National Treasury has revised upwards the Pay As You Earn (PAYE) revenue target by Sh140.6 billion, banking on the reinstatement of the PAYE tax rate to 30 percent from 25 percent, effective from January 1.

As a result, the target for the fiscal year ending June 2021 has gone up to Sh376.9 billion.

Analysts at Genghis Capital, however maintain that this target may not be achieved due to the negative impact of the pandemic on the labour market.

This has been tied to spill over effects of coronavirus including salary reduction, layoffs and temporary leaves translating to lower monthly average wage earnings.

“We doubt the revised PAYE revenue target will be achieved in second half of the 2020/21 fiscal year. Backtracking to March 2020, prior to the onset of Covid-19, PAYE revenue performance was (already) subpar by 5.8 percent its target,” said Genghis Capital head of research Churchill Ogutu.

“The Finance Committee hinged its pro-argument majorly on the government relaxing the containment measures in September. We opine this is less compelling and omits the negative knock-on pandemic fallout on the labour market, and subsequently, PAYE revenue stream.”

They also noted that while the tax rate was revised to 30 percent, not all the changes brought in April were tracked back.

The Treasury maintained the higher level of tax exempt pay at Sh24,000, compared to the Pre-Covid level of Sh12,298.

Given that the majority of formal sector workers earn below Sh100,000 a month, the foregone taxes will remain a significant hit on the governments revenue target.