Kenya Revenue Authority, KRA has recorded its first VAT collection decline in over a decade, dropping 1.11% to Sh151.33 billion in July-September 2023.
The decline, comes despite the implementation of eTIMS, while individual earnings tax rose 24% to Sh152.58 billion.
The decline reflects diminished consumer purchasing power amid increased payroll deductions and economic challenges.
The decline in VAT collections reflects eroded consumer purchasing power, attributed to increased payroll deductions including the new affordable housing levy and Social Health Insurance Fund, which now account for 40-45 percent of gross pay according to the Federation of Kenya Employers.
The situation has been further exacerbated by high loan obligations and reduced money circulation, leading to weakened business sales and delayed consumer spending, as evidenced by the Stanbic Kenya Purchasing Managers Index (PMI).
Despite KRA's efforts to make VAT its primary source of new tax revenue, experts suggest the need for practical reforms, including collecting VAT at import or manufacturing points, revising the VAT threshold from Sh5 million to Sh8-10 million, and reconsidering eTIMS requirements for small businesses.
The trend indicates that economic growth, rather than compliance measures alone, may be key to increasing tax revenues in Kenya's largely informal economy.
In Related News, Kenya Revenue Authority has hit the one trillion shilling mark after collecting Ksh1.005 trillion as of 30th November, 2024.
This reflects an upward trajectory in revenue collection, compared to the previous financial year (2023/2024), when it achieved the same milestone on 7th December 2023 with Ksh1.009 trillion.
The revenue collected in the last 5 months (July – November 2024/25) amounting to Ksh1,005.183 billion reflects a growth of 4.3% compared to Ksh963.746 billion collected in the same period last financial year.
In spite of the progressive growth, the collection was affected by various economic indicators that directly drive revenue collection.
The various indicators that significantly impact on revenue performance have generally moved contrary to expectations, with adverse impact on revenue mobilisation.
Key among these indicators is the significant low domestic demand as indicated by the slowed Purchasing Managers Index (PMI) that averaged at 48.94 points in July – November 2024 indicating a contraction in the economic activities.
This is also indicative from the modest growth in overall import values of goods by 1.0% in the five months of 2024/25, which is a main source of both raw materials and final consumer goods.
Furthermore, Government being a key consumer of VATable goods has applied austerity expenditure measures that negatively affects various key sectors over time.
However, in a remarkable achievement, customs continue to record an above Ksh70 billion-mark monthly collection in the last four months (August – November 2024/25).
Thus, cumulatively (July – November 2024) customs revenue collections amounted to Ksh359.571 billion, a growth of 5.9% over Ksh339.678 billion realized in the same period of FY 2023/24.
Domestic taxes amounted to Ksh643.790 Billion in July – November 2024, translating to a revenue growth of 3.5% over Ksh621.984 Billion realized in July – November 2023.
KRA targets to collect 2.704 trillion by the end of Financial Year 2024/2025. KRA says is confident that it will continue with the upward trajectory and achieve the set target to enable the government to sustain the country’s economy.
Finally, Kenya's sophisticated tax system, despite being one of Africa's most advanced with digital platforms like iTax and e-TIMS, struggles with low compliance.
Only 15% of registered companies paid taxes and 6.3 million individuals filed returns in 2023, in a population of over 50 million.
The disconnect stems from a mismatch between the system's complexity and Kenya's economic reality, where the informal sector accounts for 80% of employment.
While e-TIMS has added only 113,000 new VAT taxpayers, the system remains challenging even for experts, requiring internet access and complex navigation.
Solutions suggested by our financial consultant include USSD-based filing systems and addressing fairness concerns, noting that tax compliance is influenced by psychological and cultural factors beyond legal requirements.
Unlike countries like the US with high voluntary compliance, Kenya's sophisticated system may be missing the mark by not aligning with citizens' needs and capabilities.