Kenya Revenue Authority (KRA) recorded a rare drop in tax collections in the first two months of this year, reflecting the subdued business activity amid fears the coronavirus pandemic will negatively impact the economy hard.
The latest data from the Treasury indicates that tax collections reduced from Sh219.56 billion to Sh216.06 billion in January and February. This is the first drop in recent times and reflects lower collections from businesses struggling with lower sales and workers plagued by stagnant pay.
Treasury Secretary Ukur Yatani expects the under-performance in revenue collection to deepen in the three months to June as effects of travel and mass gathering as well as the night curfew imposed last week to curb the spread of coronavirus take a toll on the economy.
Both imports as well as domestic consumption have slowed down as a result of the impact of the virus, hitting taxes.
“We are looking at under-performance, as a result of just Covid-19, of about 70 billion (shillings)… in terms of revenue for the remaining three months (of this financial year),” Mr Yatani said.
Kenya has confirmed 42 cases of coronavirus and is seeking assistance from the International Monetary Fund (IMF) and the World Bank as economic sectors such as tourism and farm exports take a hit.
The Central Bank of Kenya (CBK) said it expects the economy to expand by 3.4 percent this year, from an initial estimate of 6.2 percent, as the virus saps demand from trading partners like Europe, besides disrupting supply chains and domestic production.
KRA was already struggling to increase tax collections even before Kenya recorded its first confirmed case of coronavirus on March 13.
Tax collection for the eight months to February stood at Sh995.38 billion, a pointer that KRA needs to collect Sh709.57 billion in four months to meet the full-year target of Sh1.7 trillion.
Key firms have put on hold hiring of new staff in an economy that has also witnessed a string of job losses in recent months, affecting nearly all sectors and depressing payroll taxes. Reduced profitability in corporate Kenya, which is underlined by nine firms listed on the Nairobi Securities Exchange issuing profit warnings, has also hurt collections of corporate taxes.
Revenue collection is expected to take a further hit following tax cuts announced on Wednesday to cushion the economy and the public against the impact of the Covid-19 pandemic.
Among the reliefs that the government offered were excluding workers earning less than Sh24,000 from paying taxes and lowering the maximum income tax rate from 30 percent to 25 percent. The government also lowered value-added tax (VAT) to 14 percent from 16 percent and cut corporate tax to 25 percent from the current 30.
“The tax cuts will have the effect of further lowering tax collections in the event that the relief does not translate to increased consumption,” said Nikhil Hira, a director at Bowmans (Coulson Harney LLP) law firm.
Restrictions on businesses like schools, bars and restaurants and social distancing are also expected to significantly impact consumer spending, which is key for growth of tax collections.
Stanbic Bank Kenya’s Purchasing Managers Index (PMI), a measure of private sector activity, showed that in February, businesses in major sectors of the economy suffered a monthly drop in new orders for goods and services for the first time since November 2017.
Restrictions on foreigners coming into Kenya have also resulted in a big hit to the country’s tourism industry, with some hotels reporting low occupancy rates or opting to temporarily close down altogether. Travel and other restrictions in Europe have also slashed daily flower orders to half for a continent that accounts for 70 percent of Kenya’s cut flower exports, further affecting tax from exports.