The Treasury has cut its tax collection target for the financial year ending June 2027 by Sh81.4 billion, with income tax accounting for the largest share of the reduction as the government lowers its expectations for economic growth and revenue collection.
The Kenya Revenue Authority (KRA) is now expected to collect Sh2.777 trillion during the 2026/27 financial year, down from the Sh2.859 trillion target contained in the earlier Budget Policy Statement.
The revision was made after the Treasury reviewed the fiscal outcome for the 2025/26 financial year, according to the newly published draft 2026 Budget Review and Outlook Paper (BROP).
Income tax has taken the biggest cut, with the projected collection reduced by Sh78.6 billion from Sh1.384 trillion to Sh1.305 trillion.
The income tax category, which includes corporate taxes paid on profits as well as Pay As You Earn (PAYE) deducted from workers' salaries and wages, remains the largest source of the expected revenue decline.
The lower tax forecast comes after the Treasury revised down its economic growth projection for 2026 from 5.3 percent to 5.0 percent.
The Treasury attributed the downgrade partly to the effects of the ongoing Middle East conflict on domestic economic activity. It expects growth to improve slightly to 5.1 percent in 2027 as external pressures ease and global supply chains return to normal.
The weaker economic outlook has also affected expectations for income tax collections, as slower activity could weigh on business profits, employment and earnings.
The Treasury has also warned that weather-related shocks could affect both economic activity and government finances during the year.
"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 government further cautioned that developments in the global economy could put additional pressure on revenue collection and public 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.
The Treasury has also lowered its projections for other major tax streams.
Value Added Tax (VAT) collections are now expected to reach Sh810.3 billion, a reduction of Sh18.9 billion from the earlier estimate. Excise duty projections have also been cut by Sh17.4 billion to Sh364.8 billion.
Other tax revenue has been reduced slightly from Sh77.4 billion to Sh76.4 billion.
Import duty is the only major tax category to receive an upward revision. The Treasury has raised its expected collection from the tax to Sh220.8 billion, an increase of Sh34.6 billion.
The new revenue projections come against a backdrop of strong contributions from a few key sectors of the economy.
KRA reported in July that manufacturing and energy remained Kenya's biggest taxpayers in the year ended June 2026. The taxman said manufacturing, energy, financial and insurance services, ICT, and wholesale and retail trade together accounted for about 62 percent of total tax revenue, despite contributing 27.4 percent of nominal GDP.
Manufacturing remained the leading contributor, paying Sh462 billion in taxes, up 9.2 percent from Sh423 billion the previous year.
The energy sector followed with Sh445 billion, representing a 9.1 percent increase.
Combined, the two sectors accounted for nearly one-third of all taxes and levies collected by KRA during the year.
"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 strong performance of the energy sector was linked to the relationship between oil imports, trade activity and revenue collected at the border.
The latest Treasury projections point to continued reliance on major sectors to finance government operations, while weaker economic growth and possible domestic and external shocks could make it harder to meet the revised tax target.