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The Treasury has raised fears of losing Sh133.5 billion in projected revenue in the current financial year following a drop in motor vehicle and fuel imports as well as lower sales of beer, spirits and cosmetics than earlier projected.
In the latest budgetary outlook paper, the Treasury says the target of Sh2.58 trillion ordinary revenue was based on projected tax receipts for the last fiscal year ended June, which, however, were considerably lower than estimated.
This is after the actual ordinary revenue — comprising taxes, levies, rent of buildings, fines and forfeitures— for previous financial year came in at Sh104.3 billion short of the estimates used as the base for projecting the receipts for the current financial year.
Read: New beer, juice and cosmetic taxes kick in
“Given this revenue shortfall, the projections for FY 2023/24 have an estimated revenue risk of Sh133.5 billion,” Treasury officials wrote in the 2023 Budget Review and Outlook Paper (BROP), whose final copy was published late Tuesday.
“Collections from the broad tax categories were below their respective targets in the period under review [FY 2022/23].”
Collections from excise duty, commonly referred to as sin taxes, fell short of the Sh293.97 billion by Sh29.47 billion. This was the highest underperformance among the main tax votes; the others being income tax, value-added tax and import duty.
“The shortfall in excise duty is explained by the decline in oil volumes, motor vehicle imports and deliveries of domestic excisable goods such as cosmetics, beer and spirits,” the BROP states.
The Kenya Revenue Authority charges Sh134 duty per litre of beer, Sh229 for wine and Sh335.30 for spirits such as whisky and gin of the same capacity. The taxes were last raised in the fiscal year ended June 2023, with the William Ruto administration sparing alcohol and cigarettes increased duty for the current fiscal year, the first relief in five years.
The freeze on taxes for the sector comes on the back of intense lobbying by manufacturers who had warned that the higher taxes would result in lower revenues while leading to a spike in illicit trade.
“For every bottle of beer sold for Sh190, Sh107 goes to the exchequer in the form of various taxes (excise, VAT and corporation tax) and Sh25 shared with distributors, leaving the manufacturers with only Sh57 to cater for inputs, machinery, staff costs and other expenses including dividends,” Kenya Association of Manufacturers chief executive Antony Mwangi told the Business Daily in August.
Cosmetics and beauty products attract excise duty at the rate of 15 percent of value, while the rate for motor vehicles ranges between 20 and 35 percent of the customs value and import duty based on the size of the engine.
On the other hand, for every litre of super petrol bought, the KRA takes Sh21.95, while the duty for diesel and kerosene is Sh11.37 per litre.
Sale of Super and diesel has been under pressure since last year when prices started hitting record levels on withdrawal of subsidy and the high cost of the essential commodity on the global markets, exacerbated by higher VAT charges from July this year.
Latest official data, for instance, show that consumption of Super petrol dropped five percent to 1.01 billion litres in six months ended June 2023 from 1.074 billion litres last year. That for diesel fell four percent to 1.31 billion litres compared to 1.36 billion in the same period.
Reduced sale of excisable goods is considered harmful, hence the term ‘sin tax’, means reduced taxes for the government.
The targeted revenues were further eroded by “subdued growth in the construction, transport and manufacturing sectors owing to the high cost of inputs and increasing inflationary pressures,” which saw domestic VAT streams underperform the Sh297.2 billion estimates by Sh24.47 billion.
Ordinary revenue
The Treasury has, however, raised projected ordinary revenue for the current fiscal year slightly to Sh2.58 trillion, which is Sh5 billion more than what it had budgeted.
Read: Alcohol, cigarettes spared tax hikes for first time in 5 years
“The National Treasury and Kenya Revenue Authority (KRA) have put administrative measures such as the full roll-out of eTIMS; integration with telcos; revamped cargo scanning; efficient management of tax refunds; and improved debt management to mitigate the revenue risk,” the Ruto administration’s money men wrote in the BROP. “In addition, tax measures in the Finance Act 2023 are expected to strengthen revenue performance,” they said.
By CONSTANT MUNDA