The Kenya Revenue Authority (KRA) has recorded its highest deficit in tax collection from employees despite the introduction of two new tax bands targeting top earners, even as the Treasury expects the tax collector to miss this year's targets by about Sh300 billion.
A quarterly report published by the National Treasury shows that KRA missed its pay-as-you-earn (PAYE) target by Sh72.3 billion in the first nine months of the current financial year.
The tax collector had a target of collecting Sh463.3 billion in salaries in the period ending March, but collected only Sh390.96 billion, meaning he missed his target by 15.6 percent, the highest shortfall according to available data.
In the Finance Act 2023, the Income Tax Law was amended to introduce two individual tax bands. The law introduced a new tax band of 32.5 percent for monthly income between Sh500,000 and Sh800,000 and 35 percent for income above Sh800,000.
However, in cumulative numbers, PAYE collections in the review period increased by 10.9 per cent to Sh390.96 billion from Sh352.57 billion in the same period last year.
Principal Treasurer Chris Kipto told MPs this week that the revenue gap forced the government to invoke the provision of Section 223 of the Constitution to give taxpayers an additional Sh7.482 billion to help mobilize revenue.
“By the end of June, we may not be able to raise the Sh300 billion we expected in the current budget. We have a revenue gap and that is why we have increased the KRA budget,” Dr Kipto said.
“Debt service is our biggest problem. In just one week, we paid Sh100 billion in debt service with interest ranging from 28% to 30%.
Lower than expected PAYE collections reflect a challenging business environment as employers freeze hiring in response to increasing costs of doing business.
Data from the Kenya National Bureau of Statistics (KNBS) shows the number of new jobs created by December 2022 fell to 816,600 from 924,900 in the corresponding period the previous year, a development that may explain the slowdown in PAYE collections in the review period that began six months later in June. From last year.
However, unemployment among the working-age population fell 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. Employment figures include a large proportion of informal sector workers who work for You pay taxes.
By the end of March 2024, total revenue collected including fines and ministerial fees, or Allocations in Aid (AIA), stood at Sh1.92 trillion against a target of Sh2.13 trillion.
Taking into account the AIA, revenue collection was Sh208.1 billion below target, with much of the deficit attributable to regular revenue which, besides PAYE, includes corporate income tax, value added tax (VAT), excise, and import duties. duty. Regular revenue fell short of target by Sh255.1 billion while AIA ministerial collection was above target by Sh47 billion.
“Ordinary revenue collection stood at Sh1,585.7 billion against a target of Sh1,840.7 billion. All regular revenue categories recorded below target performance during the period under review, with the exception of other revenues which exceeded Its target is Sh8.1 billion.
Several macroeconomic factors have led to a stagnant business environment, including rising inflation and interest rates due to global supply shocks caused by the war in Ukraine and the lingering effects of the COVID-19 pandemic.
The PAYE deficit is worse than that recorded in the third quarter of the 2020/21 financial year when containment measures to limit the spread of the pandemic led to business closures and layoffs. In that period, PAYE collections were below the target of Sh24.8 billion or about 8.9 percent of the target.
PAYE collection was also poor in the period ending March 2017 when KRA fell short of the target of Sh276.4 billion by 8.9 percent.
PAYE is paid mostly by employees, and is one of the largest sources of government revenue. Other income taxes include corporate income tax, which companies pay at a rate of 30 percent for resident companies and 35 percent for non-resident companies.
Income taxes include withholding tax and capital gains tax, which are paid on gains resulting from the transfer of real estate or unquoted shares. Together, the unpaid taxes are classified as “other income tax” and were Sh53.3 billion short of the target, or a 14.5 per cent shortfall of the Sh366.46 billion target.
Overall, income taxes – which reflect increased production – fell short of the target of Sh125.69 billion.
Dr Kipto said the Treasury was not able to contain the fiscal deficit which rose from a target of 5.5 per cent to 5.6 per cent in the current financial year.
He said the budget deficit rose from Sh868 billion to Sh908.6 billion in the current financial year.
“We are trying as much as possible not to go through the year with unpaid bills. If it wasn’t for that, we would have done like last year where we scaled back everything and shut down the Integrated Financial Management Information System (Ifmis),” said Dr. Kipto.
“This shortfall is largely due to shortfalls in revenue performance and liquidity constraints.”
He said recurrent and development expenditure remained below target by Sh179.3 billion and Sh140.8 billion respectively.
He said the Treasury had outstanding bills worth Sh18.79 billion that had been submitted for verification.
