Weak economy leaves Sh97.7 billion tax hole

Government revenue in the first nine months of the current financial year fell short of target by Sh97.7 billion, prompting the Treasury to cut budgeted funds for development projects by nearly Sh34.37 billion.

Cumulative revenue collections, including appropriations in aid, amounted to Sh1.1796 trillion between July 2018-March 2019 against a target of Sh1.2773 trillion, Treasury Secretary Henry Rotich disclosed in documents to the National Assembly.

Mr Rotich said the Kenya Revenue Authority (KRA) underperformed collection targets in income tax, value-added tax (VAT), import duty, railway development levy and import declaration fee, without disclosing specific numbers.

This is linked to reduced activity in the economy that has seen listed firm issue profit warnings, freeze hiring and expansion on the factory flows

“The implementation of FY (full-year) 2018/19 budget continues to face various challenges. These include the current drought in some parts of the country, underperformance of projected revenues and increased demand for additional expenditures,” he said.

The Treasury is seeking parliamentary approval for additional Sh70.85 billion towards recurrent expenditures such as salaries, allowances and administrative expenses through the second supplementary budget.

This will reverse the earlier Sh9.06 billion cut in recurrent budget in the first mini-budget approved late September 2018, bringing the net increment to Sh61.79 billion from the original approved estimates.

Shortfalls in revenue collection targets widens the budget deficit, which is bridged through borrowing to meet cash demands for public service delivery, maintenance costs and development projects.

“The overall change in the national government ministerial budget (excluding county allocations and consolidated fund services such as public debt and pension payments) from the original approved budget is an increase of Sh27.4 billion, which reflects a 1.6 percent change,” Mr Rotich says.

Slow recovery

The increment in the original budget is within the 10 percent ceiling provided for under article 223 of the Constitution.

Outgoing KRA Commissioner-General John Njiraini earlier in the year linked underperformance in tax collections to slow recovery by private companies from 2017 election jitters, which hurt investment sentiment.

“Tax targets are determined largely by economic indicators such as economic growth and performance in employment. If those don’t work, then tax will also be impacted,” Mr Njiraini said on January 16.

“We had significant issues that affected business because of the prolonged election process. We are gradually getting out of it, but we are not fully out of it.

“Even this year we still have businesses complaining and expressing concerns regarding the pickup of economic activity and sluggish demand which is affecting the bottom-line in terms of profitability.”