Kenya Revenue Authority collections from profits, asset transfers and other business activities have remained in single digits for two consecutive years amid a raft of new and higher taxes.
The Kenya Revenue Authority collected Sh488.10 billion from corporate profits from operations and capital gains from transfers of property and shares in the year ended June 2024, up 9.28 percent from Sh446.67 billion the previous year.
The single-digit annual increase in taxes on profits earned by companies, cooperatives and trusts was the second in a row after it grew by 7.80 percent from Sh414.35 billion in the last financial year ending June 2023.
Collections fell by Sh91.42 billion or 15.78 per cent from the Treasury’s estimate of Sh579.52 billion for the year ended June, giving credence to the school of thought that President Ruto’s administration’s increased focus on higher and new taxes will not necessarily lead to higher collections.
Former Treasury Secretary Njuguna Ndung’u surprised many last week when he joined the chorus calling on Kenya to focus more on increasing tax compliance rather than increasing tax rates.
“We have to move away from the idea that high tax rates will lead to higher tax revenues. The reality is the opposite. Because high taxes cannot bring you high tax revenues, what should we do? We have to look at how we can improve every tax instrument,” Professor Ndung’u said as he handed over office.
The 2023 Finance Act will also introduce a 5% withholding tax on local sales promotion, marketing and advertising services and digital content monetization at 5% for locals and 20% for foreigners.
Other measures in Dr Ruto’s first Finance Act included increasing the corporate sales tax from one per cent to three per cent of annual sales, while halving the sales threshold to Sh25 million.
The law, whose constitutionality has yet to be determined by the Supreme Court, also imposes a three percent tax rate on income generated from the transfer or exchange of digital assets such as cryptocurrency transactions.
While President William Ruto admitted that the decision to introduce new and higher tax measures was “difficult” and “painful,” he stressed last December that the government’s options to raise revenue were limited.
“The political measures required to mobilise the necessary revenue were difficult, but they were our only escape route,” Dr Ruto said on December 12, as the country celebrated its 60th anniversary of independence.
The challenging operating environment last year prompted most companies to freeze investments in new branches, capacity expansion and new product launches, according to an analysis of Stanbic Bank’s monthly Purchasing Managers’ Index (PMI) reports.
The slowdown in corporate tax collections has been reflected in more than a dozen listed companies issuing profit warnings to shareholders, meaning their earnings have fallen by more than a quarter compared to last year.
These companies include Limuru Tea, Unga Group, Sanlam Kenya, Express Kenya, Sameer Africa, WPP Scangroup, Crown Paints, and Car & General.
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