Payroll taxes register biggest shortfall since Covid-19

Payroll taxes in the first quarter of the current financial year fell short of target by the biggest margin since the Covid-19 pandemic period, reflecting a tough labour market where firms are struggling to generate new jobs and offer pay rise.

The Kenya Revenue Authority (KRA) netted Sh123.04 billion on earnings by workers in the July-September 2023 period, the latest disclosures by the National Treasury show, against a goal of Sh142.93 billion.

The shortfall of 13.91 percent or Sh19.88 billion was the biggest since a similar period for the financial year 2020/21 when the underperformance amounted to 21.12 percent or Sh19.16 billion due to Covid-related reliefs between May and December 2020.

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The slowdown in the Pay as You Earn (Paye), came despite an 11.38 percent growth to Sh110.47 billion, indicating the William Ruto administration had expected jobs to grow at a faster rate.

The Treasury has in the Budget Review and Outlook Paper (BROP) largely blamed the below-target performance in Paye receipts on “delayed disbursements to various Government entities which affected the (payroll) remittances from the public sector.”

The growth in payroll taxes from the government and its agencies has further been compounded by a long-standing moratorium on new employment in civil service that restricted hiring in essential sectors such as security, education and health since December 2013 in a bid to rein in the wage bill.

Private businesses have, on the other hand, complained of increasing cost of operation, with a “multitude” of taxes and levies pushing smaller firms into the informal, or jua kali, sector.

“Many businesses especially the MSMEs (micro small and medium-sized enterprises) cannot afford the costs associated with operating in the formal employment sector,” FKE executive director Jacqueline Mugo told the Business Daily in an interview earlier in the year.

“This has led to the growth in the number of unemployed Kenyans as many employers try to manage their costs,” she said.

The shortfall in payroll taxes in the review period came at a time when companies reportedly battled flagging sales, prompting them to pause hiring.

Firms have since July, when additional taxation measures were enforced amidst elevated inflationary pressures, complained of slowed demand for goods and services.

The exception was in August when a supposed truce between President Ruto and opposition leader Raila Odinga in the form of bipartisan talks lifted business confidence.

However, the higher cost of fuel and electricity amid cost-of-living pressures arising from increased taxation resulted in the freezing of employment from September, according to the findings of Stanbic Bank Kenya’s Purchasing Managers Index (PMI), based on feedback from about 400 corporate managers.

The labour markets toughened from October when corporate managers reported they had shed jobs at a rate last witnessed at the peak of Covid-19 curbs in June 2020.

“The rate of job cuts accelerated to a solid pace that was the joint-quickest since June 2020,” analysts at Stanbic Bank and American analytics firm, S&P Global, wrote in the PMI report for October. “Panellists commented on both the non-replacement of leavers and staff reductions due to lower workloads.”

Businesses have in the past year battled the stubbornly rising price pressures on the back of high cost of materials and energy as well as a weakening shilling in addition to short supply of dollars.

They have reported a “marked drop” in demand for goods and services, which they have linked to elevated inflationary pressure and cash flow challenges. The inflationary pressures have eroded consumers’ purchasing power, reduced demand for goods and services, and constrained new investments.

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The Treasury data shows excise duty fell short of first quarter target of Sh79 billion by 13.20 percent while value added tax underperformed the Sh158.13 billion goal by 3.23 percent.

Corporate income tax also fell short by 7.87 percent after netting Sh120.91 billion in the three-month period, while import duty was 21.51 percent short of Sh41.32 billion.

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