The Kenya Revenue Authority’s collections from profits and proceeds from asset transfers for companies and other businesses have remained in the single digits for two consecutive years amid a raft of new and higher taxes.
The KRA collected Sh488.10 billion on corporate earnings from operations and capital gains from the transfer of property and shares in the year ended June 2024, up 9.28 percent from Sh446.67 billion a year earlier.
The single-digit annual increase in taxes on profits earned by companies, cooperatives and trusts was the second in a row after growing 7.80 percent from Sh414.35 billion in the last fiscal year ended June 2023.
The collections fell short of Treasury’s estimates of Sh579.52 billion for the year ended last June by Sh91.42 billion or 15.78 percent, lending credence to the school of thought that President Ruto’s administration’s increased focus on higher and new taxes will not necessarily result in higher collections.
Former Treasury Cabinet Secretary Njuguna Ndung’u surprised many last week when he joined the chorus calling for Kenya to focus more on increasing tax compliance rather than increasing tax rates.
“We have to move away from this notion that high tax rates will raise high tax revenue. The reality is the opposite,” Prof Ndung’u said while handing over the office. “Because high taxes cannot bring you high tax revenue, what do we need to do? We need to study how we can optimise each tax instrument.”
The Finance Act 2023 will also introduce a five percent withholding tax on domestic sales promotion, marketing and advertising services and monetisation of digital content at five percent for locals and 20 percent for foreigners.
Other measures in Dr Ruto’s first Finance law included an increase in turnover tax for businesses from one percent to three percent of annual turnover, with the turnover threshold halved to Sh25 million.
The law, the constitutionality of which remains to be determined by the Supreme Court, also imposed a three percent tax rate on income derived from the transfer or exchange of digital assets such as cryptocurrency transactions.
While President William Ruto admitted that the decision to introduce new and higher tax measures was “difficult” and “painful”, he maintained last December that the government’s options for raising revenue were limited.
“The policy measures required to mobilise necessary revenues have been difficult, but they were our only way and means of escape,” Dr Ruto said on December 12 when the country marked 60 years of independence.
Last year’s challenging operating environment prompted the majority of companies to freeze investments in new branches, production capacity expansion and new product launches, according to analysis of Stanbic Bank’s monthly Purchasing Managers’ Index (PMI) reports.
The slowdown in corporate tax receipts was reflected in the more than a dozen listed companies that issued profit warnings to shareholders. This means that their profits fell by more than a quarter year-on-year.
They include Limuru Tea, Unga Group, Sanlam Kenya, Express Kenya, Sameer Africa, WPP Scangroup, Crown Paints and Car & General.
