IMF tax measures hand President Ruto 19.4pc revenue increase in October

Tax receipts rose by nearly a fifth to hit Sh170.48 billion in October compared to a similar period last year as the William Ruto administration started reaping the benefits of increased taxation under IMF-backed measures.

The Kenya Revenue Authority (KRA) collected Sh170.48 billion in tax revenue for the month— a 19.42 percent growth over Sh142.775 billion in the month a year ago— data Treasury Secretary Njuguna Ndung’u published showed on Friday.

October marked the first month the taxman started receiving cash from enforcement of the second round of ruling Kenya Kwanza’s painful taxation measures in Finance Act 2023.

These included Export and Investment Promotion Levy on the importation of cement clinker, iron and steel as well as paper and paperboard and digital assets tax on the online sale of content, music, ebooks, photos, documents, and videos.

The year-on-year growth in tax inflows for the month was nearly twice the 10.55 percent rise to Sh514.26 billion in receipts for three months through September.

Read: IMF backs phased rollout of new taxes amidst backlash

This came in a period the KRA enforced new taxation measures such as doubled value-added tax (VAT) on fuel to 16 percent and 1.5 percent housing levy that is deducted from the gross pay of all workers and matched by employers.

The housing levy is seen as a form of double taxation on personal earnings as the KRA uses same gross to deduct Pay As You Earn (Paye).

The increased collections for October came at a time when company managers reported job cuts over September grew at the fastest pace since the peak of Covid-19 curbs in June 2020.

This was on the back of a “marked drop” in demand for goods and services which the firms linked to elevated inflationary pressure and cash flow challenges amid higher taxation. Construction and wholesale & retail were the hardest hit sectors, according to the findings of Stanbic Bank Kenya’s Purchasing Managers Index (PMI) for October.

Inflation — a measure of cost of living over the past 12 months— edged up for the first time in five months to 6.9 percent in October from 6.8 percent a month earlier.

This was the first growth since May’s 8.0 percent.

“Cost-of-living pressures and cashflow difficulties saw customer demand declining, while weaker output and lower workloads led to an increased rate of job cuts,” Christopher Legilisho, an economist with South African-based Standard Bank, the parent firm of Stanbic Bank, wrote in the PMI report.

“Meanwhile, Kenyan businesses reported burgeoning inventories and therefore raised their selling prices in October to protect their profit margins. Input prices and purchase price pressures faced by Kenyan businesses were attributed to a further increase in fuel prices and transport costs.”

Overall, tax revenues for the first four months of this financial year ending June 2024 have grown 12.63 percent to Sh684.75 billion.

The new painful taxes, which have hit salaried workers and importers hardest, are key to helping the Treasury achieve fiscal consolidation plans for the current year ending June 2024.

The austerities target to reduce the hole in the budget – which is filled through borrowing – to 4.4 percent of gross domestic product from an estimated 5.8 percent in the year ended June.

“(On new taxes), we are only concerned about the impact of the high debt levels that we have. I know, sometimes, we think that there is a lot to cut on expenditure but you will be surprised to know… there is very little room for sharp expenditure cuts and we don’t want to cut development expenditure,” Central Bank of Kenya Governor Kamau Thugge said on July 17. “So it’s really very important that we mobilise revenue so that we reduce borrowing so as to stabilise our debt going forward.”

President William Ruto has on several occasions said Kenya has the potential to mobilise Sh3 trillion annually in taxes.

Read: Kenya gets Sh162bn IMF loan top-up on tax reforms

“A huge obstacle to the realisation of our national revenue target is that in practice tax administration has traditionally been a repressive, menacing affair which resembles extortion,” Dr Ruto said at a past event. “This extinguishes taxpayer incentive and diminishes the prospect of an expanded tax base pulling Kenyan backwards from its national revenue potential and denying its citizens critical services and development programmes.”

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