Kenya targets higher revenues in VAT reforms

The government is working on new measures aimed at encouraging tax compliance.

In the pipeline are reducing the Value Added Tax (VAT) to below the current 16 per cent and scrapping tax exemptions, said Dr Geoffrey Mwau, the economic secretary.

A lower VAT, though will help in reducing cost of goods and services, puts Kenya in collision path with other East African Community members.

“We intend to boost our revenue collection effort by 22 per cent to 24 per cent of the gross domestic product. We can raise about Sh100 billion from removing tax exemptions.”

He did not give details on scrapping the exemptions.

The move is part of reforms targeting taxation policies about which the business community has perennially protested, he said.

Businesses qualifying for VAT refunds under several criteria —including being tax exempt— have had to wait for up to a year.

This has piled pressure on cash flows and resulted in lost investment opportunities.

For consumers, a lower VAT regime should translate into low price tags for goods and services.

Inflation rose marginally to 3.6 per cent in July from 3.5 per cent in June.

Food and non-alcoholic beverages – the heaviest weight on the consumer price index at 36.04 – rose by 0.5 per cent over the previous month and by four per cent in the year to July.

Housing, electricity, gas, and fuels, the second weighty component in the CPI at 18.3, also climbed by 0.3 per cent over the previous month and by 2.8 per cent in the last 12 months.

Rising optimism

The government hopes to boost revenue collection from a lower VAT regime to fund the record Sh997 billion budget in an economy which is still faced with downside risks though there is rising optimism of reaching a 4.5 per cent growth target or higher.

The taxman collected Sh148.3 billion or 25.6 per cent of all revenue collection from VAT taxes in the 2009/10 year and announced a target of Sh641.2 billion for this fiscal year.

By raising an estimated Sh100 billion from the removal of tax exemptions, for instance, Treasury will be closer to keeping its stock of total debt to about 40 per cent of GDP and domestic borrowing to around 3.8 per cent of GDP, down from 6.2 per cent in the previous fiscal year.

The government plans to raise about Sh105 billion from the domestic market to meet this fiscal year’s budget deficit.

The lowering of VAT rate comes after the Finance minister Uhuru Kenyatta announced a raft of business reform policies in this year’s Budget.

As a priority, the government will by the end of this month pay all VAT refunds that have been vetted as payable.

“All new claims that meet the low risk criteria will be paid within 120 days,” Mr Kenyatta said.

By adopting a low VAT regime, Kenya will complicate the plot for its neighbours in the EAC market that is supposed to issue a common tax rate, including VAT as part of the integration efforts.

While Kenya, Uganda, Tanzania, and Rwanda charge 30 per cent corporate tax, Kenya’s 16 per cent VAT is the lowest compared to the rest that levy a rate of 18 per cent.

If other EAC members are to follow suit, they will have to contend with lower revenues.