Market News

Serious Drop In Taxes Collected By KRA Signals An Economy Already In Recession

BY Soko Directory Team · November 14, 2024 12:11 am

KEY POINTS

The planned tax increases by the government are unlikely to lead to a substantial rise in revenue. Instead, they are more likely to push businesses and consumers further into financial distress. If businesses are unable to pass on the tax burden to consumers due to already high prices, they may be forced to cut back on production, leading to layoffs and a further reduction in consumption.

KEY TAKEAWAYS

As tax revenues continue to underperform, the government's reliance on more taxation as a means to plug budget deficits will likely backfire. With businesses facing higher operating costs, and consumers already squeezed by inflation, the additional tax burden will only exacerbate the economic decline.

Kenya’s tax collection performance in recent months paints a grim picture of a struggling economy and a government that seems disconnected from the harsh realities on the ground. A 26.3% decline in VAT collection in October, resulting in a KES 2.37 billion shortfall, highlights the severity of this trend. VAT, which is one of the mainstays of Kenya’s revenue system, relies heavily on consumer spending. When people have less disposable income due to inflation and economic stagnation, consumption drops. This drop is compounded by the high cost of living and limited job creation, leading to a weaker consumer base. Consequently, VAT collection shrinks, despite the government’s attempts to raise taxes in the hope of plugging fiscal gaps.

Further, the government’s expectations of increased revenue from PAYE (Pay As You Earn) taxes have been dashed, as evidenced by the KES 1.21 billion shortfall attributed to large taxpayer offsets and reduced monthly employee cash payments. This underscores a critical issue in Kenya’s employment landscape: wage stagnation and the reduced purchasing power of workers. With businesses struggling to pay employees adequately and workers facing higher living costs, PAYE receipts have dwindled. This is compounded by the increasing frequency of tax rebates, which, while offering temporary relief, ultimately undermine the system’s efficiency and fail to stimulate sustainable growth in tax revenue.

Domestic excise duty, too, has been impacted, with a KES 573 million shortfall attributed to decreased consumption in sectors like alcohol, tobacco, bottled water, and soft drinks. These industries, once reliable revenue streams for the government, have seen their sales drop as a result of the ongoing recession, which has lowered consumer demand. The government’s reliance on such sectors, while lucrative in good times, becomes a liability when the economy contracts. As businesses struggle to maintain profitability in the face of sluggish consumption, their ability to pay excise taxes diminishes, exacerbating the shortfall in government revenue.

Another concerning trend is the fall in excise duty from mobile money transactions, which dropped by KES 728 million due to lower transaction values. Mobile money, once a key driver of financial inclusion and a major contributor to tax receipts, is now showing signs of strain. This decline in transaction values can be attributed to a combination of factors: economic uncertainty, lower household incomes, and a shift away from mobile money platforms in favor of more affordable or cash-based alternatives. This shift, if it continues, poses a serious threat to the government’s ability to collect revenue from one of its most innovative and successful tax mechanisms.

The underperformance of import duties, excise taxes, VAT, and the Infrastructure Development Fund (IDF) also signals trouble for the economy. With a KES 2.87 billion deficit, this revenue shortfall reflects a slowdown in non-oil imports, exacerbated by reduced demand for goods and services due to the ongoing economic contraction. Additionally, the rise in exemptions granted to various sectors and industries has further eroded potential revenue streams. These exemptions, intended to stimulate business activity, instead result in less tax collected, further straining the government’s fiscal position.

The current trends in Kenya’s tax collection suggest that increasing tax rates in an already struggling economy is not the solution to the country’s financial woes. Instead, these measures risk deepening the recession by stifling consumption and investment, ultimately reducing the revenue base further. The government’s failure to recognize the cyclical nature of taxation in a recession, where higher taxes lead to lower economic activity and, consequently, lower tax revenue, points to a deeper problem of fiscal mismanagement.

As tax revenues continue to underperform, the government’s reliance on more taxation as a means to plug budget deficits will likely backfire. With businesses facing higher operating costs, and consumers already squeezed by inflation, the additional tax burden will only exacerbate the economic decline. This, in turn, will result in a vicious cycle where lower consumption leads to less VAT collection, while diminished business activity further depresses PAYE and excise duties. The government, rather than stimulating growth, risks creating a downward spiral that could plunge Kenya deeper into recession.

In light of these challenges, it is clear that Kenya is facing an economic crisis that cannot be solved through taxation alone. The government’s fiscal policies are disconnected from the realities of the market. Rather than focusing on increasing tax rates, the government should shift its focus to stimulating economic growth through structural reforms, investment in key sectors, and the promotion of entrepreneurship. Without a clear strategy to address the underlying causes of the recession, Kenya’s economic trajectory will continue downward, and the government’s attempts to increase taxes will only worsen the situation.

As the economic outlook grows increasingly bleak, the government must consider alternatives to its current tax-heavy approach. The focus should shift to enhancing the efficiency of tax collection, improving public sector productivity, and implementing policies that stimulate demand and growth. Without these critical changes, Kenya risks deepening its recession and worsening its fiscal position.

The government’s failure to respond to the changing economic dynamics suggests a lack of understanding of the basic principles of taxation. As Kenya’s economy faces a growing recession, it is evident that higher taxes do not necessarily equate to higher tax revenue. Instead, they could exacerbate the economic challenges faced by businesses and consumers, leading to further fiscal shortfalls and economic decline. If the government continues on its current path, Kenya may find itself trapped in a cycle of recession with no clear exit strategy.

About Soko Directory Team

Soko Directory is a Financial and Markets digital portal that tracks brands, listed firms on the NSE, SMEs and trend setters in the markets eco-system. Find us on Facebook: facebook.com/SokoDirectory and on Twitter: twitter.com/SokoDirectory