Higher salaries for civil servants major boost to KRA kitty

Civil servants’ salary increments were the main driver of growth in tax collection in the first half of the year as consumption related taxes stagnated, a new Treasury report shows.

A break down of Kenya Revenue Authority’s (KRA) tax collection data between July and November shows income tax contributed Sh22.5 billion of the Sh29.9 billion increase recorded in the first five months of the financial year.

Civil servants, mainly teachers, lecturers, and doctors got salary increases last year, some of which were backdated to July 2012.

The growth in income tax to Sh126.6 billion from Sh103.7 billion last year saw the sector’s contribution to the taxman’s basket grow to 44.2 per cent from 40.2 per cent.

“The increase (in tax collection) was largely on account of income tax,” said the Central Bank of Kenya in a bulletin released last week.

KRA has already released its half-year report showing that total tax collection between July and December increased 12.6 per cent to Sh380.6 billion, but the taxman has not revealed the contribution of income tax to overall revenue.

Excise duty, import duty, and value added tax increased by Sh3.1 billion, Sh3 billion, and Sh1.6 billion respectively.

The revenue body was expected to have collected about Sh4.6 billion from the Sh21 billion salary package awarded to teachers and lecturers in September last year after a three-week haggling with the government.

“Many trade unions have been agitating for increases which has led to a bloated wage bill, but that has also seen more people climbing the tax bracket,” said Samuel Nyandemo, an economics lecturer at the University of Nairobi.

Growth of the income tax bracket, which includes corporate taxes on profits made by companies and capital gains on investment, was also attributed to improved performance by firms, especially large ones.

By November, banks had already reported Sh100 billion in profits while shares of blue chip companies listed at the Nairobi Securities Exchange have been on a rally as investors anticipate higher profits.

“KRA has been aggressive and income tax is easy to enforce. Initially there were so many loopholes,” said Joseph Kieyah, an analyst at Kenya Institute of Public Policy Research and Analysis (Kippra).

The growth in income tax, however, still fell short of the Sh135.9 billion target by Sh9.3 billion.

In total, the taxes were Sh43.7 billion less of the targeted collection, attributed to slow economic growth and legislative challenges.
Value added tax was the second largest contributor at Sh72.6 billion, followed by excise duty at Sh33.2 billion then import duty at Sh23.5 billion.

“The other taxes are largely consumption taxes — VAT, excise — seem to suggest lower consumer spending which supports the point that the economy is sluggish.  Don’t forget many consumers were also bearing the brunt of high interest rates last year meaning less disposable income,” said Mr Hira.

Treasury had also banked on the passage of the VAT Bill which was to increase the bracket of taxable products. The taxman had hoped to collect an extra Sh5 billion on the Bill’s passage.

Assenting to the Finance Bill, which gives the taxman legal backing to implement tax measures proposed in the Budget statement, was also delayed to this year creating uncertainty. This was after legislators made amendments to the initial bill awarding themselves huge payoffs which were rejected by President Kibaki.

The taxman, who is lagging behind Budget targets by over Sh40 billion, has also become more aggressive in a bid to cover the short fall.

(Read: KRA sets up special unit to track down rich tax cheats)

KRA has set up a unit with 300 officers to police water and juice products for tax compliance as it introduces new-generation tax stamps in a move estimated to raise an extra Sh6 billion.

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