Why taxman faces sharp dip in revenue collection
A surge in profit warnings by companies, especially the banking sector, is expected to hit Kenya Revenue Authority (KRA) collections this year, the Institute of Certified Public Accountants (Icpak) has said.
The companies including commercial banks such as KCB Bank, Diamond Trust Bank (DTB), Stanchart, Co-op Bank, I&M Bank have issued profit warnings, saying their earnings will drop by more than 25 per cent.
Others are TPS Serena, Longhorn Publishers, Nairobi Business Ventures, Nation Media Group, Unga group, East African Breweries and Kenya Orchards.
This means that there are more privately owned firms whose earnings will drop.
GDP growth
Analysts at Icpak reckon that tax revenues could contract faster than gross domestic product (GDP) growth.
This mirrors the position held by the Organisation for Economic Development and Corporation(OECD) in a report for developed countries.
“Corporation income plays a big role compared to other income tax sources, any decline in corporate profits has an impact on overall tax revenues,” Icpak manager for public policy and research Elias Wakhisi said during an IEA budget forum in Nairobi yesterday.
Commercial banks are facing liquidity challenges due to high non- performing loans totaling Sh1.4 trillion.
This has seen them sell Sh70 billion worth of government debt since the beginning of the fourth quarter of last year.
Corporation taxes contribute an estimated Sh200 billion to the total domestic tax basket, according to KRA data. Most of these are banks and large blue chip firms.
This could negatively affect the taxman’s plan to collect more revenues by removing the income tax waiver for companies.
Icpak said the taxman needs to widen the taxbase, adding that the number of taxable entities were reducing. The professional body for certified public accountants urged KRA to deal with profit shifting by multinational entities.
“KRA should institute stronger measures to stem base erosion and profit shifting by multinational corporations,” said Wakhisi.
Treasury is expected to borrow nearly Sh937 billion according to the budget estimates for the next financial year.
Underperformance by KRA could push the government into further borrowing. Public debt is expected to Sh8.6 trillion by the end of June 2022.
“This is closer to the public debt limit of Sh9 trillion but there are downside risks in the event revenue underperforms,” said Genghis Capital in an investor brief.
Tax revenues
Corporation taxes at the end of last year helped KRA to book record tax revenues raising sentiment that tax collection was finally out of the woods.
However, some of these collections were seasonal such as corporate tax.
Kenya Association of Manufacturers on the other hand are pushing the taxman to increase allocation for tax refunds.
Currently the National Treasury allocation for tax refunds is Sh1.7 billion which is not enough,” said Job Wanjohi, head of policy research at KAM.
