Kenya Misses Tax Collection Target by $2 Billion Despite Raising Taxes

Despite the tax hikes introduced in Kenya’s 2023/2024 Finance Bill, the Kenya Revenue Authority (KRA) fell short of its tax collection target by $2.09 billion (KES 267 billion) for the financial year ending June 2024. This shortfall is attributed to a challenging macroeconomic environment marked by declining corporate profits and increased layoffs.

The KRA had set an ambitious revenue target of $21.8 billion (KES 2.79 trillion) for the year under review.

Corporation Income Tax (CIT), which is derived from corporate profits, grew at a modest rate of 4.9%, down from 7.2% in the previous year, reflecting reduced profitability in key sectors such as finance, insurance, ICT, and manufacturing.

Employee collections through the pay-as-you-earn (PAYE) system recorded the largest shortfall of $567 million (KES 72.3 billion), despite the introduction of a new tax band in 2023 targeting top earners.

The manufacturing sector experienced the steepest decline in tax collection, dropping by 13%, followed by the ICT sector at 12.3%, while the finance and insurance sectors saw a 2.4% decrease. High operational costs, including energy prices and the depreciation of the Kenyan shilling against the dollar, were significant contributors to the economic downturn.

Humphrey Wattanga, KRA’s commissioner-general, highlighted the impact of high input costs and energy prices on the manufacturing sector. “Weak demand for manufactured goods, affected by high retail prices resulting from high import-driven input costs and high energy costs, played a major role,” Wattanga stated.

KRA collected $18.8 billion (KES 2.4 trillion) in taxes for the 2023/2024 financial year, an 11.1% increase compared to the previous year. Although the agency fell short of its overall target, achieving 95.5% of it, there was a notable 34.9% growth in revenue collected for other government programs.

Kenya’s tax revenue performance in 2023/2024 mirrors the country’s broader economic challenges. The economy grew at a moderate rate of 5.6% in 2023, up from 4.9% in 2022, but inflation remained a significant issue, averaging 6.86% in the first half of the year due to high fuel and energy costs.

However, the Central Bank’s monetary policies succeeded in reducing inflation to an average of 4.87% by the fourth quarter, resulting in an annual average of 6.22%—a substantial improvement from the previous year’s 8.78%.