The Kenya Revenue Authority (KRA) has recorded its highest shortfall in tax collections from employees despite the introduction of two new tax bands targeting top earners, even as the Treasury projected that the taxman would miss this year's targets by about Sh300 billion.
A quarterly report published by the National Treasury shows that the KRA missed its pay-as-you-earn (PAYE) target by Sh72.3 billion in the first nine months of the current financial year.
The taxman had a target of collecting Sh463.3 billion from salaries in the period ending March, but only raised Sh390.96 billion, which means it missed its target by 15.6 percent, the highest shortfall according to available data.
In the Finance Act 2023, the Income Tax Act was amended to introduce two individual tax bands. The Act introduced a new tax band of 32.5 percent for a monthly income of between Sh500,000 and Sh800,000 and 35 percent for income above Sh800,000.
However, in cumulative numbers, the PAYE collections in the review period increased by 10.9 percent to Sh390.96 billion from Sh352.57 billion in the same period last year.
Treasury Principal Secretary Chris Kiptoo told MPs this week that the revenue gap forced the government to invoke the provision of Article 223 of the Constitution to give the taxman an additional Sh7.482 billion to help in revenue mobilisation.
“By the end of June, we may not be able to collect the Sh300 billion that we anticipated in the current budget. We have a revenue gap and that is why we increased the budget of the KRA,” Dr Kiptoo said.
“Debt service is the biggest problem that we have. In one week alone, we paid Sh100 billion in debt service with interest accounting for 28 percent to 30 percent.”
The lower-than-expected PAYE collections reflect a tough business environment as employers freeze hiring in reaction to increased costs of doing business.
Data from the Kenya National Bureau of Statistics (KNBS) shows that the number of new jobs created by December 2022 dipped to 816,600 from 924,900 in similar period a year earlier, a development that might have explained the sluggish PAYE collections in the review period which started six months later in June last year.
However, unemployment among the working-age population dropped marginally to 13.9 percent of the working population in the fourth quarter of 2023 from 13.3 percent in the same period in 2022. The employment figures include a big fraction of the workers in the informal sector who do not pay taxes.
By the end of March 2024, total revenue collected including ministerial fines and fees, or appropriations in aid (AIA), amounted to Sh1.92 trillion against a target of Sh 2.13 trillion.
Factoring in the AIA, the revenue collection was below target by Sh208.1 billion, with a big chunk of the shortfall attributed to ordinary revenue which, besides PAYE, includes Corporate Income Tax, value added tax (VAT), excise duty, and import duty. Ordinary revenue fell short of the target by Sh255.1 billion while the collection of the ministerial AIA was above the target by Sh47 billion.
“Ordinary revenue collection was Sh1,585.7 billion against a target of Sh1,840.7 billion. All ordinary revenue categories recorded below target performance during the period under review except other revenue which surpassed its target by Sh8.1 billion,” said the Treasury in the Quarterly Budget Review for the third quarter of the Financial Year 2023/24.
Several macro-economic factors have depressed the business environment, including high inflation and interest rates owing to the global supply shocks triggered by the war in Ukraine and the lingering effects of the Covid-19 pandemic.
The PAYE shortfall is worse than the one recorded in the third quarter of the Financial Year 2020/21 when the containment measures to curb the spread of the pandemic resulted in business closures and layoffs. In that period, PAYE collections fell short of the target of Sh24.8 billion or around 8.9 percent of the target.
Collection of PAYE was also anaemic in the period ending March 2017 when the KRA fell short of the Sh276.4 billion target by 8.9 percent.
PAYE is paid mostly by the salaried and is one of the government’s largest revenue streams. The other income taxes include the corporation income tax, which is paid by corporations at the rate of 30 percent for resident firms and 35 percent for non-resident types.
Income taxes include withholding tax and capital gains tax, which is paid on gains on the transfer of properties or unquoted shares. Together, non-PAYE taxes are categorised as ‘Other Income Tax’ and fell short of the target by Sh53.3 billion, or a shortfall of 14.5 percent of the Sh366.46 billion target.
In total, the income taxes—which reflect increased production—fell short of the target of Sh125.69 billion.
Dr Kiptoo said the Treasury has not been able to contain the fiscal deficit which went up from a target of 5.5 percent to 5.6 percent in the current financial year.
He said the budget deficit had increased from Sh868 billion to Sh908.6 billion in the current financial year.
“We are trying as much as possible not to cross the year with unpaid bills. Otherwise, we would have done like last year where we were cutting down everything and shutting down the Integrated Financial Management Information System (Ifmis),” Dr Kiptoo said.
“This shortfall was largely on account of the shortfalls in revenue performance and liquidity constraints.”
He said both recurrent and development expenditures remained below target by Sh179.3 billion and Sh140.8 billion respectively.
He said the Treasury has pending bills amounting to Sh18.79 billion that were submitted for verification.
