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Business closures, lay-offs cost Treasury Sh153b tax

By Dominic Omondi | July 19th 2020 at 12:00:00 GMT +0300

The adverse effects of Covid-19 have seen the government significantly cut its projected tax collection from businesses and workers by Sh153 billion, pointing to a tough economic landscape.

Consequently, the Exchequer expects to net Sh377 billion from employees in the formal sector, a reduction by close to a fifth from the Sh468.5 billion it had targeted at the beginning of the last financial year.  

This is captured in a new report by the National Treasury, which gives estimates of all the government’s revenues, grants and loans for the 2020-21 financial year.

For businesses, the National Treasury, led by Cabinet Secretary Ukur Yatani, has set its eyes on collection of Sh308 billion, a reduction of Sh61 billion from the target that it had set in July last year.

While big corporations pay 14 per cent of income tax on their profits, small businesses are expected to pay one per cent of turnover tax on their sales every month.

Covid 19 Time Series

 

However, Yatani also introduced a minimum tax on loss-making businesses starting this July.  

As at the end of 2019, there were 2.9 million Kenyans in formal employment, which means they paid taxes to the government.

However, this number is likely to reduce following a wave of lay-offs and forced leave experienced in various sectors that have been hit hard by the pandemic.

Closure of schools, for example, will see the government miss out on tax collection from over 200,000 teachers who have been rendered jobless by the directive.

Other sectors that might not recover fully, even after the government gave them the green light, include hospitality especially high-end hotels, as a cloud of uncertainty hangs over the industry. 

Lost income

Entertainment joints such as nightclubs and pubs will also take long to recover as the government continues to implement social distancing rules, including prohibition of all social and political gatherings.

The loss in income tax - Pay-As-You-Earn (PAYE) and corporate income tax - is also due to the decision by President Uhuru Kenyatta to offer tax reliefs to businesses and employees to cushion them against the crippling effects of the pandemic.

Employees with a basic salary of Sh24,000 and below were spared PAYE while those in the other income bands saw their maximum tax rate slashed from 30 per cent to 25 per cent.

Already, KRA has missed its tax collection target by Sh350 billion, collecting Sh1.43 trillion compared to the original target of Sh1.8 trillion in the 2019-20 financial year.

However, the target had since been revised downwards, which means that the taxman had technically missed the target by Sh12 billion.

Another tax head, value-added tax (VAT), which was also slashed from the standard 16 to 14 per cent to reduce the crippling effects of Covid-19, will also underperform with KRA expected to collect Sh481.6 billion from consumption of goods and services compared to a target of Sh496 billion in the previous year.

However, excise duty, which is charged on the use of goods and services such as airtime, beer, cigarettes, juice and beauty products, is expected to earn the Treasury slightly more this year. The exchequer targets to raise Sh244 billion, slightly more than the Sh242 billion collected in the last financial year.   

In his budget speech last month, Yatani noted that the pandemic and the swift containment measures, including closure of the airspace and borders, curfews and cessation of movement in some counties have not only disrupted Kenyans’ way of life but business too. 

“These measures, including enforcement of basic hygiene and social distancing, were not only necessary but also timely as they have indeed stemmed a surge of infections and loss of lives,” the CS said.

A recent survey by the Kenya National Bureau of Statistics (KNBS) showed that the pandemic continued to devastate Kenyans in May, leaving more without jobs and millions at risk of being kicked out of their homes because of inability to pay rent.

According to the survey, the fraction of individuals who were out of work due to Covid-19-related challenges surged during the month compared to April.

For every 10 respondents that said they were out of work, six blamed Covid-19 for their unemployment, an increase from just about half in April.

Another 15 per cent of the respondents cited temporary business closure as the main reason why they were absent from work.

With reduced incomes, a lot of Kenyans struggled to pay rent, transport, or even put food on the table, revealed the KNBS survey which looked at the impact of the pandemic on health, labour market, transport costs and housing.

Many of the jobless people struggled to pay rent, including 30.9 per cent who had never struggled and had religiously met their end of the bargain every month.

Generally, 37 per cent of respondents were unable to pay rent, with slightly over a third paying on time. A tenth of the households partially paid their rent.

Some institutions, such as the International Monetary Fund, have projected that the economy will plunge into recession as it reels from the Covid-19 effects.

Others such as National Treasury, Central Bank of Kenya and African Development Bank have been more optimistic.


Covid-19 Business closure Taxes
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