The National Treasury has cut its tax revenue target for the current financial year ending June by Sh81.4 billion, signaling weaker-than-expected collections from corporate and workers' earnings.

The Treasury expects the Kenya Revenue Authority (KRA) to net Sh2.777 trillion in taxes during the financial year 2026/27 from the Sh2.859 trillion target set in the Budget Policy Statement released earlier.

The estimates were adjusted after taking into account the fiscal outcome of the financial year 2025/26, the Treasury said in its newly published draft 2026 Budget Review and Outlook Paper.

The biggest blow to revenue is expected from income tax, with the Treasury having lowered expected collections by Sh78.6 billion, from Sh1.384 trillion to Sh1.305 trillion.

Read: Treasury posts wider Sh90bn revenue miss

This makes the income tax streams—largely corporate income tax on profits and Pay as You Earn on wages and salaries-- the largest contributor to overall revenue downgrade.

Treasury has already cut Kenya’s 2026 economic growth forecast to 5.0 percent from 5.3 percent, citing the adverse effects of the ongoing Middle East conflict on domestic economic activity.

Officials said earlier growth is expected to recover slightly to 5.1 percent in 2027 as external pressures ease and global supply chains normalise.

The weaker growth outlook helps explain the lower tax projections, particularly reduction in income tax expectations, as Treasury becomes less optimistic about revenue generation during the current financial year.

Treasury officials warned that domestic weather shocks could undermine economic activity and public finances. “Adverse weather conditions, including droughts, floods and erratic rainfall, could weaken agricultural production, disrupt food supply and increase inflationary pressures, with implications for household purchasing power and economic activity,” the draft 2026 BROP says.

The document also warns that external shocks could further strain revenue collection and state finances.

“A sustained increase in international oil prices could raise domestic fuel and transport costs, widen the import bill and place upward pressure on inflation and the current account,” Treasury officials wrote, adding that tighter global financial conditions could raise external financing costs, weaken capital inflows and increase exchange rate pressures.

Treasury also lowered Value Added Tax projections by Sh18.9 billion to Sh810.3 billion and excise duty expectations by Sh17.4 billion to Sh364.8 billion.

Other tax revenue was trimmed slightly to Sh76.4 billion from Sh77.4 billion, extending the downward revision across major domestic tax categories.

Import duty is the only major tax source revised upward, with Treasury increasing expected collections by Sh34.6 billion to Sh220.8 billion.

The revision comes after KRA reported in July that manufacturing and energy cemented their position as Kenya’s biggest taxpayers during the year ended June 2026.

KRA said manufacturing, energy, financial and insurance, ICT, and wholesale and retail trade generated about 62 percent of total tax revenue despite accounting for only 27.4 percent of nominal GDP.

The figures underline the government’s dependence on a handful of sectors to finance the Exchequer and suggest that any slowdown in their profitability, investment or employment could significantly affect income tax collections.

Manufacturing remained the largest contributor after paying Sh462 billion, up 9.2 percent from Sh423 billion, while energy generated Sh445 billion after growing 9.1 percent.

Together, manufacturing and energy contributed nearly one-third of all taxes and levies collected by KRA in the year ended June 2026.

"Its contribution is linked to value addition, jobs, supply chains and importation of raw materials, which accounted for 49.0 percent of overall import value," KRA said of manufacturing. KRA said the energy sector’s performance reflected the strong relationship between oil imports, trade activity and revenue collected at the border.

Financial and insurance firms contributed Sh320 billion, with corporation tax accounting for 34.8 percent of sector collections, while withholding income tax and PAYE jointly contributed 47.1 percent.

ICT generated Sh248 billion from Sh230 billion, supported by excise duty on airtime and financial services, corporation tax, domestic VAT and PAYE.

Wholesale and retail trade contributed Sh288 billion after expanding 10.3 percent, reflecting stronger trade, distribution, consumption and business transactions across the economy.

→ cmunda@ke.nationmedia.com

Follow our WhatsApp channel for the latest business and markets updates