Freeze on Finance Act and high tax targets put KRA in a tight corner

KRA's Times Tower offices. The taxman has a target to collect Sh2.57 trillion over the financial year to June 2024. [Wilberforce Okwiri, Standard]

The Finance Act 2023 set the record as the fastest to be signed into law, but will now likely set another for taking long before being implemented.

Its delayed implementation has now hit the Kenya Revenue Authority (KRA), which cannot collect the new tax measures contained in the law.

And every passing day will make it complex for the taxman to meet its revenue collection targets for the 2023/24 financial year.

KRA missed its tax collection target for the financial year to June 2023 and experts warn that this could be replayed over the current financial year on account of delay to implement the Finance Act, 2023 as well as a high target that the National Treasury has set for KRA.

The taxman collected Sh2.166 trillion against a target of Sh2.19 trillion. It was however a growth of 6.64 per cent from Sh2.031 trillion the previous year.

The taxman has a target to collect Sh2.57 trillion over the financial year to June 2024. The year is already off to a rough start following the freeze on the Finance Act 2023.

Failure to meet the tax collection targets usually sees the government incur higher debt levels to finance the budget.

Experts have in the past said the government should severely cut spending to reduce the need to borrow heavily but despite pronouncements of planned budget cuts, austerity is never achieved.

“The revenue performance was affected by the slowed domestic economic growth in 2022 which went down to 4.8 per cent from 7.6 per cent in 2021,” said KRA.

“The decelerated domestic economic growth was due to adverse impact of multiple shocks that affected the economy, including a prolonged drought, international conflicts that disrupted the supply chain among others. The revenue collection signifies a performance rate of 95.3 per cent against the target.”

Other than the economic growth that was expected to help lift tax collections, the new tax measures contained in the Finance Act were expected to play a critical role in bringing an additional Sh289.3 billion.

This would enable KRA to increase tax revenues to Sh2.57 trillion over the current financial year. 

The taxman has however gone two weeks with the new tax revenues still in limbo following the court’s temporary stoppage of implementation of the Finance Act 2023 following a petition filed by Busia Senator Okiya Omtatah arguing that the law has unconstitutional clauses.

Ken Gichinga, Chief Economist at Mentoria Economics, said that the country is still in the early days of the financial year and hence the impact of suspending the implementation of the Act might be minimal.

Budgetary crisis

Mr Gichinga, however, warned that should this continue, it might affect the new taxes that KRA was expected to collect to meet its Sh2.57 trillion target for the 2023-24 financial year.

“It will really depend on how long the matter stays in court. Right now, we are still in the first two weeks of the fiscal year, so the impact may be minimal. But if it drags on further, real fiscal risks will begin surfacing,” he said.

The Attorney General, in submissions to the High Court sought to unfreeze the Act - together with other State agencies including KRA - noted that orders stopping its implementation could result in a budgetary crisis in the country.

The additional tax revenues of Sh289.3 billion that the Finance Act 2023 seeks to bring translate to about Sh24 billion a month. While the government is still collecting some of the new taxes following the hike in VAT on fuel to 16 per cent, one could say that the state is already staring at a Sh12 billion hole as the Act stays suspended for two weeks. 

KRA on average collected Sh180 billion a month in the last financial year, and while Sh12 billion is not much in the grand scheme of things, it would go a long way in enabling the taxman to meet the target.

“In the previous financial year 2022/2023, the government had a budget of Sh3.3 trillion and a tax revenue target of Sh2.2 trillion,” said tax consultants Cliffe Dekker Hofmeyr Kenya in their analysis of the new Finance Act.

“However…  the government is struggling to raise tax revenue in a depressed economy. Only time will tell whether the Act will be the magic bullet to Sh2.57 trillion tax revenue target.”

Failure to meet the revenue target to finance the Sh3.68 trillion budget for the 2023-24 financial year could result in the government borrowing more.

At the moment, the budget deficit stands at Sh720 billion that will be financed through debt, of which Sh522 billion will be sourced locally and Sh199 billion through foreign borrowing. This could go up if KRA does not meet its revenue collection target.

In a June report, the National Assembly’s Budget and Appropriations Committee noted that the National Treasury has over the years been oblivious to certain realities and in turn tended to set high targets for KRA.

The committee said the under performance by KRA usually results in a growing budget deficit, which forces the government to borrow more to bridge the gap between its spending and the tax revenues.

Over the last financial year, the committee said, KRA’s under performance in revenue collection as of the time of preparing the second Supplementary Budget saw the fiscal deficit including grants grow by Sh16.9 billion from Sh824 billion (5.7 per cent of gross domestic product) to Sh840.9 billion (5.8 per cent of GDP).

“This (shortfall in revenue collection) is an indication that the National Treasury continues to set over ambitious revenue targets during the budget making process result in larger than projected fiscal deficit towards the end of financial year when the revenue targets are not met,” the committee said.

“As such, the deficit has always remained a moving target over the years.”

The government is expected to meet the expanded deficit through local borrowing, which the committee said could see banks deny businesses and households loans and instead lend to the government through buying Treasury bills and bonds.