Kenya’s VAT collections dropped by 4.3% in the six months to December 2024—the first decline since the Covid-19 pandemic. Factors include reduced consumer spending and higher salary deductions, leading to a total revenue of Sh304.1 billion. This decline contributed to a Sh93.2 billion revenue shortfall in the first half of the financial year, impacting various tax categories significantly.
Kenya’s Value Added Tax (VAT) collections experienced their first decline since the onset of the Covid-19 pandemic, registering a decrease of 4.3% during the six months leading to December 2024. The total revenue from VAT fell to Sh304.1 billion from Sh317.8 billion in the same period of 2023, as reported by the National Treasury. Key factors contributing to this downturn include decreased consumer spending and increased payroll deductions from workers’ salaries.
The decline in VAT revenue indicates a significant drop in household incomes, heavily influenced by recent increases in statutory salary deductions. These deductions include contributions to the Social Health Insurance Fund and remittances to the National Social Security Fund (NSSF), alongside a new Housing Levy which deducts 1.5% off gross salaries. As a result, disposable incomes for consumers have been significantly affected, limiting their ability to spend.
This decrease in VAT collections has significantly contributed to an overall revenue shortfall of Sh93.2 billion experienced in the first half of the 2024/25 financial year. The ordinary revenue collected during this period was Sh1.157 trillion, failing to meet the target of Sh1.251 trillion. Notably, every broad tax category under ordinary revenue fell short of their respective targets, with VAT showing the largest discrepancy at Sh36.5 billion.
This marks the first contraction in VAT revenue since the initial effects of the pandemic in 2020, when consumer spending was restricted due to government regulations such as curfews and closures of entertainment venues. In response to the economic downturn during that time, the government temporarily reduced VAT from 16% to 14% but reinstated the higher rate in 2021 to manage fiscal deficits and stabilize revenue collection.
Overall revenue collection, which includes ministerial appropriations, also failed to meet expectations, resulting in a shortfall of Sh107.6 billion. Specifically, ministerial appropriations amounted to Sh176.9 billion, falling short of the anticipated Sh191.3 billion, thereby contributing to the overall revenue gap.
In summary, Kenya’s VAT collections have declined for the first time since the Covid-19 pandemic, attributed to lower consumer spending and increased payroll deductions. This decline has led to a significant revenue shortfall for the government, impacting various tax categories. The overall slowdown underscores a critical economic challenge, emphasizing the need for effective fiscal policies moving forward.
Original Source: eastleighvoice.co.ke
