Economy

Corona tax cuts cost KRA Sh1 billion daily

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Times Tower. KRA head office. FILE PHOTO | NMG

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Summary

  • The KRA collected Sh333.47 billion in the three months to June, reflecting a drop of 20.58 percent of Sh419.90 billion in a similar period last year.
  • The rare drop in tax collections came in a period when Kenya reduced value-added tax (VAT) from 16 percent to 14 percent and cut income and corporation tax from 30 percent to 25 percent in April.
  • The raft of tax changes are geared at lowering the cost of basic goods while providing workers with additional income for spending to boost consumption and traders’ sales.

Tax cuts aimed at protecting the economy against the effects of the coronavirus pandemic cost the Kenya Revenue Authority (KRA) nearly Sh1 billion daily in the three months to June, the Treasury has revealed.

The KRA collected Sh333.47 billion in the three months to June, reflecting a drop of 20.58 percent of Sh419.90 billion in a similar period last year.

The rare drop in tax collections came in a period when Kenya reduced value-added tax (VAT) from 16 percent to 14 percent and cut income and corporation tax from 30 percent to 25 percent in April.

The raft of tax changes are geared at lowering the cost of basic goods while providing workers with additional income for spending to boost consumption and traders’ sales.

Reduced business activity, layoffs and pay cuts that followed the imposition of restrictions to curb the spread of Covid-19 also reduced opportunities for the KRA to raise tax collections.

Government spending on development projects like roads, power plants and water infrastructure was hit by the lower revenue collection, further hurting the economy.

State spending puts money in the pockets of workers as well as private firms linked to infrastructure works.

This, in turn, affects suppliers and subcontractors down the value chain.

Markit Stanbic Bank Kenya Purchasing Managers Index (PMI) – a monthly measure of private sector activity such as output, new orders, employment and supplies delivery times – has shown business deals remained in contraction from January through June.

“The damage done by Covid-19 could last for the better part of the next six months, notwithstanding what official growth statistics may indicate,” said Stanbic Bank head of research for Africa Jibran Qureishi.

“The impact from the loss of jobs and the subsequent decline in consumption will probably be felt for a while.”

The Treasury says economic growth could fall to 2.5 per cent in 2020 but may go lower to 1.8 per cent, compared with 5.4 per cent a year earlier

The Treasury data shows the fall in tax collection was 30 per cent in May when KRA collected Sh89.87 billion.

It dropped 18.27 per cent to Sh123.50 billion in June, while April’s collection fell 14.46 per cent to Sh120.1 billion.

The government has bowed to pressure from the International Monetary Fund (IMF) and agreed to do away with income tax, value-added tax and sales levy cuts.

Treasury Secretary Ukur Yatani reckons that once the Covid-19 pandemic ends, the government will have to review the tax breaks to close the gap between the Budget and expected revenues estimated at Sh840 billion.

There were minimal tax increases on basic items to fund the 2020-2021 Budget amid pressure for the KRA to raise an additional Sh131 billion to bring tax collection to Sh1.62 trillion.

The KRA’s collections for the year to June remained unchanged at Sh1.45 trillion compared to a similar period last year.

Mr Yatani said the tax cuts will cost Kenya Sh172 billion and he is hoping to fill the gap by clawing back tax incentives through the Finance Bill, 2020.

The incentives are expected to generate Sh38.9 billion, which will account for 22.6 percent of the foregone taxes.

The IMF has also raised Kenya’s risk of debt distress to high from moderate due to the impact of the coronavirus crisis

Kenya’s debt stood at 61.7 percent of GDP at the end of last year, up from 50.2 percent of the end of 2015.