Key tax revenue streams shrink in October as hardships hit economy
Kenya Revenue Authority Commissioner General Humprey Wattanga.
Kenya's tax collection from key revenue streams suffered a dip in October, exposing the prevailing financial strain on businesses and consumers alike.
According to statistics from the Kenya Revenue Authority (KRA), revenue from Domestic Value Added Tax (VAT) declined by 26.3 percent during the month under focus, resulting in a KES2.37 billion shortfall.
This drop was primarily experienced across sectors that have traditionally supported the country's tax revenue base. Some of the affected segments of the economy were: administrative and support services, energy, oil and gas, finance, and wholesale and retail trade.
The decrease in VAT is a reflection of the vulnerability of Kenya’s economy amid shifts in consumer spending power and tough business environment that is eroding profitability of businesses.
Key sectors, which usually account for around a third of domestic VAT contributions experienced downturns, KRA data shows. Collectively, these sectors represented just 14.7 percent of turnover sales in October, while input growth remained marginal at 0.5 percent.
This decline in domestic VAT is one of four categories within the Domestic Tax Department (DTD) that registered lower-than-expected collections.
For instance, Pay-As-You-Earn (PAYE) tax collections from the private sector fell short by KES1.21 billion, primarily due to large taxpayer office clients offsetting liabilities using tax refunds, KRA said.
At the same time, reduced monthly cash payments per employee, another indicator of economic slowdown, further contributed to the collections shortfall.
“This is explained by utilisation of refunds amounting to KES90.5 million to offset PAYE tax liabilities by a number of LTO taxpayers, reduction in average monthly cash pay per employee from Sh78,034 in Jun-Sept 2023 down to Sh75,781 in Jun-Sept 2024, pointing to effects of ongoing restructuring by various organisations to manage operational costs,” says the taxman.
This is especially concerning for a government that relies on PAYE remittances as a primary source of revenue, given the direct link to employment levels and wage stability.
Domestic Excise Duty, another key source of revenue, declined by KES573 million in October. Lower contributions were reported from manufacturers in the beverage sector—beer, bottled water, tobacco, and soft drinks—mirroring a decline in consumption and production levels.
Additionally, excise duty on money transfers in the banking sector experienced a decline of KES728 million, reflecting reduced transaction volumes as both businesses and consumers tighten their financial belts.
The slowdown has also impacted import-related tax categories, as shown by underperformance in non-oil taxes, which recorded a KES2.87 billion shortfall, hitting just 93.7 percent of the target.
Additionally, lower-than-expected contributions from import duty, excise duty, VAT on imports, and import declaration fees on standard goods collectively added to the deficit.
Read also: Kenya’s private sector shows signs of revival in October
Excise duty and VAT
Import duty collections alone fell short by KES266 million, while excise duty and VAT on imports registered deficits of KES814 million and KES2.25 billion, respectively. The import declaration fee also missed its target by KES405 million.
The KRA attributes these declines to reduced revenue per Twenty-Foot Equivalent Unit, and increased tax exemptions and lower non-oil import values.
Overall, these shortfalls are concerning given that import taxes play a vital role in government revenue. In Kenya, imports are critical to supply chains as they determine the availability or otherwise of consumer goods.
The drop in tax revenues reflects the broader economic struggles in Kenya, where rising costs and tightening credit conditions continue to grip both businesses and individuals.
With fewer resources flowing into the treasury, the Kenyan government may face additional pressures to fund critical public services and investments, potentially leading to budgetary constraints.
Moreover, as businesses continue to grapple with reduced profit margins and lower turnover, the KRA's ability to meet future revenue targets could be compromised.
