Treasury cuts tax target as layoffs bite, firms’ profit dip

Treasury has cut revenue target by Sh100 billion as staff layoffs bite, corporate profits dip and several firms close shop.

Acting Cabinet Secretary Ukur Yatani said yesterday during a meeting with the Committee on Finance and Planning of the National Assembly that expenditure rationalisation will follow as pressures for more funds increase in the course of Financial Year 2019/20.

“We shall be revising the revenue estimates for  2019/20 downwards by Sh100.6 billion to Sh2.015 billion or 18.7 per cent gross domestic product (GDP) from the printed Sh2.116 billion or 19.7 per cent of GDP,” Yatani told the committee yesterday. He said ordinary revenues to the exchequer amounted to Sh1.5 trillion by June against a target of Sh1.6 trillion.

Broad categories

“The shortfalls against the target were recorded in all broad categories with income tax recording the largest shortfall of Sh56.8 billion – on account of shortfall in the other income tax of Sh46.9 and pay-as-you-earn (PAYE) of Sh10 billion,” the CS added.

This development comes amid unease in the corporate circles with 15 companies listed on the Nairobi Securities Exchange (NSE) making it clear that they are not making enough money, saying they cannot make ends meet.

During this period, East Africa Portland Cement Company (EAPCC) identified the competition and lack of sufficient capital as reasons why it cannot continue to operate as expected hence the need to send home 448 permanent and 488 contract employees on its payroll packing.

Stanbic Bank and East African Breweries (EABL) parent company Diageo has already issued layoff warnings to workers targeting 200 and 100 employees respectively.

Telkom Kenya announced plans to lay off 575 workers or 72 per cent of its workforce, ahead of its proposed merger with Airtel Kenya. This will leave the telco with a skeleton staff of only about 225.

Amana Capital Chief Investment Officer Reggie Kadzutu said Kenya has a model that grows output but not income.

“Consumption taxes don’t do well if income is not growing. This shades light on whether GDP growth translates to income growth in Kenya,” he said. Corporate taxes and value-added tax (VAT) are a function of demand, demand is a function of disposable income.

“There is no growth in the latter hence ripple effects of accounting economic growth not real economic growth,” he said.

Francis Kamau partner at Ernst & Young said apart from job cuts which have seen many employees laid off, the immigration department has also kept them at bay with tighter regulations.

Income tax

He said attempts to curtail the proliferation of expatriates are also eating into income tax. “They usually earn up to three times what locals earn and it is a big deal at the tax office,” he added.

Reduction in corporate profits, the tax expert said, is also a function of a dip in appetite by foreign direct investors (FDI) as companies relocate to other countries such as Dubai and Ethiopia. 

Tough business environment has also made it difficult for renowned local and international players such as Uchumi, Nakumatt, Choppies, EAPCC, Athi River Mining to operate in the country.

Michael Mburugu, partner at PKF Kenya said that a drop in VAT is a clear sign that consumption has declined due to lower purchasing power which is occasioned by a sustained economic downturn.

Similarly, a reduction in corporate tax revenue shows that businesses are struggling.

“What will follow next is a sharp decline in PAYE due to ongoing widespread layoff of employees by a number of companies,” he said.

Mburugu said the country requires a solid strategy to save companies from imminent collapse.