The Kenya Revenue Authority (KRA) has signalled it is grappling with significant challenges as it races to collect Sh2.704 trillion by the end of the 2024-2025 fiscal year.
Despite having collected Sh1.009 trillion in the first five months of the fiscal year, KRA must now secure an additional Sh1.695 trillion in the remaining seven months to meet President William Ruto-led government’s ambitious target.
This means KRA must collect about Sh242 billion every month for the next seven months to hit National Treasury’s target.
KRA admitted that economic indicators paint a troubling picture for tax collections.
It cited the Purchasing Managers Index (PMI) which averaged 48.94 points from July to November 2024, signalling a contraction in the country’s economic activity.
The PMI is a key indicator of manufacturing and service sector health. A PMI below 50, as seen with an average of 48.94 points, suggests a contraction in economic activity.
This contraction typically leads to reduced business output. Consequently, lower production levels mean businesses generate less revenue, leading to decreased taxable income by the tax agency.
Spending less
A contracting economy also often results in reduced consumer confidence and spending, directly affecting sales tax revenues.
A low PMI can affect various types of tax revenues collected by KRA including Value-Added Tax (VAT). With businesses and consumers spending less, VAT collections are likely to decline, impacting overall revenue.
It can also affect Corporate Tax where reduced business activity can lead to lower profits, resulting in diminished corporate tax revenues.
It can also impact imports and customs revenue with the PMI’s contraction impacting import activities.
According to KRA, this is compounded by a modest 1.0 per cent growth in import values, which are crucial for generating tax revenue.
KRA officials also expressed concerns that government austerity measures aimed at curbing expenditure on Vatable goods could further hinder revenue mobilisation.
“In spite of the progressive growth, the collection was affected by various economic indicators that directly drive revenue collection. The various indicators that significantly impact revenue performance have generally moved contrary to expectations, with adverse impact on revenue mobilization,” said KRA in a statement, yesterday.
“Key among these indicators is the significant low domestic demand as indicated by the slowed Purchasing Managers Index (PMI) that averaged at 48.94 points in July - November 2024 indicating a contraction in the economic activities.”
The taxman added: “This is also indicative of the modest growth in overall import values of goods by 1.0 per cent in the five months of 2024/25, which is a main source of both raw materials and final consumer goods. Furthermore, the government being a key consumer of Vatable goods has applied austerity expenditure measures that negatively affect various key sectors over time.”
Despite these challenges, KRA remains optimistic about its ability to mobilise revenue.
KRA for instance highlighted a 4.3 per cent growth in revenue compared to the same period last year, with collections totaling Sh1.005 trillion as of November 30, 2024.
A notable contributor to this growth has been customs revenue, which has consistently exceeded Sh70 billion monthly over the past four months, said KRA.
“Customs continues to record above Sh70 billion mark monthly collection in the last four months (August-November) in the financial year 2024/205. Thus July-November 2024 customs revenue collections amounted to Sh359.57 billion, a growth of 5.9 per cent over Sh339.68 billion realised in the same period in the financial year 2023-2024,” said the taxman.
A 1.0 per cent increase in import values however suggests that businesses are not bringing in goods at the same rate as before.
This can lead to lower customs revenue, which is vital for KRA’s overall collection strategy, hinted KRA. If the persisting economic conditions persist, KRA may need to get the Treasury to adjust its revenue projections.
The Treasury might need to lower its collection targets or implement new strategies to boost revenue in response to ongoing economic challenges.
