Job cuts leave KRA with Sh29bn income tax gap

Shrinking company profits and employee layoffs by struggling firms slashed the taxman’s revenue projection by Sh68.6 billion last year, a new Treasury report has shown.

The two tax categories contributed the most to Kenya Revenue Authority’s (KRA) Sh124.6 billion total shortfall for the 2017/18 financial year, according to the Treasury data released early this month.

KRA collected Sh1.36 trillion in the year, falling below the Sh1.49 trillion target.

Total revenue collection, including fees and penalties levied by government ministries, hit Sh1.49 trillion last year against a target of Sh1.66 trillion. The revenue shortfall raises concerns as to whether the government can raise up to Sh1.949 trillion projected in the current (2018/19) financial year – a 17.5 per cent increase from last year’s target.

Revenue shortfall in successive years has seen the Treasury turn to massive borrowing to finance the recurrent budget, fund development projects and repay public debts that has now crossed Sh5 trillion. The cash crunch has seen the Treasury struggle to make disbursements to ministries, departments and agencies (MDAs) as well as to counties.

Payroll and corporate income taxes were the biggest underperformers in generating State revenues in a year characterised by poor company profitability and loss-making that saw thousands lose their jobs.

Income tax paid by salaried workers in form of Pay As You Earn (PAYE) fell Sh29.2 billion short of target, as “other” income taxes including those paid by companies were Sh39.5 billion short of target.

Revenue collected within ministries and grants from donors (described as appropriations-in-aid or A-I-A) also fell short of target by Sh47.8 billion.

Excise duty, which is payable on consumer goods, raised Sh179.4 billion that was Sh16.9 billion below projection, valued added tax (both local and on imports) was below target by Sh21.2 billion while expected investment income was Sh7.4 billion short.

An analysis by the International Budget Partnership (IBP), an international NGO that monitors national and county budgets, shows that the key reason for the failure to meet budget targets over the past four years is attributable to unrealistic revenue projections.

“We have already seen that these expectations are not realistic; the national government only takes in 20 per cent of total revenue in the first quarter, and 46 per cent by the end of December.

Additionally, the data shows that neither MDAs nor Consolidated Fund Services receives even 46 per cent by the end of the second quarter; on average, MDAs receive 43 per cent of their annual revenue by December. It is unlikely that counties receive more than this,” says the IBP analysis. IBP researcher John Kinuthia says the recurrent problem of failure by government agencies and counties to report their cash collections was behind the shortfall in appropriations-in-aid targets.

“We noted the problem of underperforming AIA since 2013 but it is a wonder that the Treasury keeps on talking about it without resolving it. We should have now known how to deal with under-reporting if that is the case,” says Mr Kinuthia.

During the first half of the financial year (July to December 2017), over a dozen companies listed on the Nairobi Securities Exchange issued profit warnings and many continued to report staff cuts in the second half of the fiscal year ending June.

Data compiled by the Business Daily shows that NSE-listed firms shed more than 4,250 jobs as they sought to reduce costs to shield their bottom line in a year that also saw a General Election, as well as two presidential elections. The economy also sunk to a five-year low to a GDP growth of 4.9 per cent.

IBP says that MDAs and counties typically received less than 50 per cent of the scheduled amounts during the first half of each year as revenue collections were below target, even though the budgeting was done as if the projections would be attained.

The analysts say that counties, for example, ended up each with unspent bank balances because the Treasury had made projections of disbursements that were out of line with the receipts.

“To improve funding predictability and avoid service interruptions, the Senate should ensure that the cash flow approved for county funding is pegged on realistic expectations of revenue and approvals from the Office of the Controller of Budget,” says IBP.

Mr Rotich in his June budget statement said that fiscal consolidation (a byword for austerity) was planned for this year, but he put forward higher spending projections of Sh2.56 trillion compared to the previous year’s spending of Sh2.11 trillion.

IBP notes that the Treasury frequently failed to explain the poor revenue performance in its reports, such as the latest one. “The quarterly economic and budget reviews fail to provide adequate reasons for performance in revenue and expenditure. In many cases, there are no explanations. Where explanations are provided, they fail to identify the root causes of poor performance and do not explain variations in performances. They also fail to acknowledge previous explanations or changes over time,” says IBP.