KRA misses revenue target despite collecting Sh2.41 trillion

KRA staffers assist clients in filing returns at its Nyeri office. [File, Standard]

The Kenyan Revenue Authority (KRA) has fallen short of its ambitious tax collection targets for the 2023/2024 fiscal year.

Despite an 11.1 per cent increase in overall revenue to Sh2.407 trillion, KRA failed to reach its target, leaving policymakers and industry stakeholders concerned about the underlying factors driving this under-performance.

KRA targeted to collect Sh2.768 trillion by the end of the financial year 2023/2024. It was reviewed downward to Sh2.5 trillion, meaning KRA missed the two targets.

A closer examination of the data reveals widening cracks in the economy, with several key sectors - including manufacturing, finance and insurance, as well as information and communications technology (ICT) - experiencing significant declines in their tax contributions.

The struggle to meet revenue targets comes at a critical juncture, as Kenya navigates a period of economic uncertainty marked by soaring inflation, currency depreciation, and weakening consumer demand.

While Kenya's overall tax revenue saw an 11.1 per cent increase in the 2023/2024 fiscal year, reaching Sh2.407 trillion, a closer look reveals concerning declines in several vital industries.

The KRA reported growth in Exchequer revenue (9.5 per cent) and domestic taxes (14.4 per cent).

However, this positive headline figure masked weaknesses in the manufacturing, finance and insurance, and ICT and communication sectors.

The manufacturing sector experienced a troubling 13 per cent drop in corporate tax instalments, as "weak demand for manufactured goods, affected by high retail prices resulting from the high cost of inputs, high energy costs, and other factors, have put pressure on the industry," according to a KRA statement.

The finance and insurance sector saw a 2.4 per cent decline, largely driven by increased provisioning for non-performing loans and foreign exchange losses due to the weakened Kenyan Shilling.

The ICT and communication industry also faced a 12.3 per cent plunge in corporate tax instalments, which the KRA attributed to "weakened demand and profitability" amid global economic uncertainty.

Despite the implementation of the Electronic Tax Invoice Management System (eTIMS) boosting domestic VAT collection by 15.3 per cent, KRA acknowledged the need to address the revenue declines in these key sectors to ensure a more balanced and sustainable strategy going forward.

"On the downside, key sectors like finance and insurance, information and communication, and manufacturing experienced declines in instalment remittances of 2.4 per cent, 12.3 per cent and 13 per cent respectively," said the taxman.

"This is attributed to reduced profitability reported by taxpayers across these sectors, explained by Increase in provisioning for non-performing loans in the banking sector that spiked as a result of high default rates."

KRA said forex losses arose from a depreciated exchange rate, especially in the first half of the financial year 2023/24. "Weak demand for manufactured goods affected by high retail prices that were a result of the high cost of inputs (mainly import driven), high energy costs," said KRA.

KRA says it has continued to leverage disruptive technology to deliver tools that enable market-customised solutions. These solutions have highly simplified tax processes, facilitated trade and enhanced voluntary compliance. "Going into the future, KRA projects to design and deploy new technology architecture that will create market-customised solutions," it said.