Why it is too early to celebrate KRA's 8.4pc tax revenue growth

KRA Commissioner General Humphrey Wattanga before the Finance and National Planning Committee at Parliament on October 24, 2023. [Boniface Okendo, Standard]

On the day that the Kenya Revenue Authority (KRA) announced a modest growth of 8.4 per cent in tax collection for quarter one of 2023/24 fiscal year, a 30-year run for a little-known private school in Nairobi’s Eastlands area came to a close.

Eastend Junior Academy may have been unknown to most people nationally, but its permanent closure leaves nostalgic memories to residents of Tena estate and surrounding areas. The school has been iconic to the local community.

Many might be wondering what is the connection between this little-known school and the performance of tax revenues in the country. But for some reason, the proprietors' decision to abandon their pupils and parents on short notice in favour of a peaceful retirement made news in sections of mainstream media and trended on social media.

You see, economic doldrums never make sense to most people until they start claiming acquaintances, friends, neighbours and family members as victims. Ultimately, it hits home when we become direct victims of the downward trajectory.

For instance, this little-known school goes down with the livelihoods of folks with names that are personally known to me. More importantly, the primary reason given for the closure by its directors is a difficult business operating environment. This strikes a code with the reasons given by KRA for their missed revenue targets by Sh79 billion for the quarter.

The question that now begs for a candid answer and soul-searching for policymakers is whether this is an isolated case.

Not Isolated

An article by Constant Munda on 12th October, 2023, in the Business Daily Africa points that at least 34 large manufacturing companies shut down their operations in Kenya in the period between 2014 – 2022. A dozen more significantly scaled down their operations in the country to remain afloat.

The Kenya Association of Manufacturers (KAM) attributes this high attrition rate of manufacturers to a general bad business environment. This toxic operating environment is fueled by high taxes, ease and cost of doing business, unhealthy competition from contraband goods and an inconsistent industrial policy that shifts with every finance bill by the government.

KAM's Manufacturing Priority Agenda 2023 report states that the sector growth has been very low and volatile for the period between 2010 -2021 compared to other countries in the region. Further, the sectors’ contribution to the Gross Domestic Product has been on a decline trend over the same period from 11.16 per cent in 2010 to close at 7.24 per cent in 2021, unlike Mauritius and Egypt that registered growths over the comparative period.  

On social media, word is that ‘Mama Suluhu’, the President of Tanzania, our neighbour to the South, has issued orders to security officers not to disturb Kenyans trooping there in droves in search of business and investment opportunities.

Anomalies

From an analytical point of view, KRA's report on their quarter one tax collection performance raises intrigues worth noting. While the overall tax collection for year-on-year comparison for the quarter grew from about Sh541.6 billion to Sh588.9 billion, the agency still missed her target for the quarter of Sh665.9 billion. However, in as much as the big numbers may sound good if one looked at them with a naked eye, they mean nothing much when it comes to analysis. What must worry any policymaker is the reasons behind the numbers and the trends of the individual tax classes.

For starters, KRA conveniently forgot to report on the performance of the controversial housing levy, the signature tax class for President Ruto’s administration.

Given the report was being made to the relevant Parliamentary Committee that was instrumental in the architecture and passing of the tax despite public protests, this omission is ominously telling. One is left wondering, did the elected representatives also forget to seek information on the achievements of their effort or was something canvassed behind the curtains that the public was not meant to hear?

The taxman attributes the failure to meet his targets to a slow economic growth, low oil import tax and defaults in remission of the Pay-As-You-Earn income tax class by both public sector agencies and private sector. Other tax classes that underperformed were oil and non-oil import taxes associated with a dampened consumption of petroleum taxes and decline on importation of non-oil products. This column long projected that tax increases will adversely affect consumption-driven taxes.

For economic analysis, Eastend Junior Academy represents the micro-economic units, KAM the macro-economic and KRA the convergence of the two on government revenues as impact of economic policy choices. Across this continuum of analysis, there appears to be a pattern that must worry any rational policymaker.

For argument's sake, let’s assume the proprietors of this private school failed to plan for the succession of their business or even failed in the management of their business at the micro-level; what then would explain the exit of the estimated 34 large manufacturers and the scaling down of operations for at least 12 others in a span of under 10 years? What would explain KAM's 10-year poor scorecard on the sector performance based on their own data? What of the taxman’s own assessment and strategic omission of its newest tax class in their reporting?

Policy implications

There would be many policy points and a demonstrable need for soul-searching for those entrusted with the management of the economy from the foregoing analysis. One, the data seems to justify the growing unease with the publics on the return on investment from the President’s many trips overseas.

On Taifa Leo this week, 38 foreign trips in a single year in office made it on the headlines. Social media has been abuzz with a public discourse on where the several memorandums signed with foreign countries and investors during these trips have been going for they do not seem to reflect on the domestic economy.

Is it too early to ask these questions or are they simply some pedestrian talk from those of us presumed to ‘lack understanding’ of the complex workings of the economy by the administration's apologists? It would be insightful to note how many foreign trips former president, Uhuru Kenyatta made and how many memoranda he signed over the duration for which most of this decline has happened. The data seems to suggest that a president's signature on a memorandum in some foreign capital does not automatically translate into investment decisions for season owners of global capital.

While we cannot dispute the inherent obligation of the head of state as the country’s diplomat number one, common wisdom dictates that in hard economic times, priorities must be centred on righting bottlenecks that hinder domestic investments before putting all the eggs in the foreign investor basket.

Two, these early indicators are significant in many ways. As KK asks for more time for us to see the returns on their efforts on the economy, it must not lost to them that time is also a factor in adjustments of capital allocations within the economy.

For instance, the KRA quarterly data may not reflect the impact of investor decisions in response to the tax costs associated with the housing levy, the pending increases in health insurance levies, VAT increases and compliance burden imposed in the 2023/24 Finance Act until after three to five years.

The fate of Eastend Junior Academy may be the early sign of things to come in the coming days as investors adjust their capital allocations to the realities of their business operating environment.

Furthermore, it would be extremely naïve to ignore separate indicators on intra-EAC trade reversals in favour of Uganda and Tanzania, our traditional key export destinations for manufactured outputs. Ultimately, however, a country's manufacturing quotient is the true measure of the integration and unification of the intelligentsia of her human capital into economic productivity.