Rotich’s new consumer levies catch taxpayers by surprise

Some of the new tax measures that Treasury Secretary Henry Rotich proposed in his Budget Statement last Wednesday came into force hours after they were submitted to Parliament, causing consumers instant pain.

Through the Finance Bill 2016, which was not immediately made available to the public, Mr Rotich instituted far-reaching tax measures that immediately raised the cost of cosmetics, high-end imported motor vehicles, kerosene as well as plastic bags and sacks.

The measures include an amendment to the withholding tax law that is being applied retrospectively from January 19, throwing suppliers (and their tax advisers) into confusion on how to handle the levy, which the law now says they should have collected.

The pain of surprise in the new tax measures is exacerbated by the fact that Mr Rotich only mentioned July 1 as the effective date in his one and a half hours budget statement, leaving the erroneous impression that the changes were at least a fortnight away.

“The speech is a snapshot of tax measures whose implementation is explained in-depth by the Finance Bill,” Lillian Kubebea, a partner with Deloitte told the Business Daily in an interview.

“I think it is unfair for the minister to hit Kenyans with taxes that take effect immediately. The least that the CS [Cabinet Secretary] should have done was to specifically single out taxes that were due to take effect immediately.”

Instant rise

The immediate application of the stealth tax measures means the prices of cosmetics and beauty products like manicure and hair products as well as make-up sets are now subject to excise duty of 10 per cent, amounting to an instant rise in retail prices for women.

Mr Rotich is seeking to raise up to Sh800 million in taxes from the cosmetics industry whose total value is estimated at Sh8 billion in a bid to arrest the Kenya Revenue Authority’s (KRA) collection shortfalls.

Another tax measure that came into effect Thursday is the Sh7.205 duty on every litre of kerosene, an increase the minister justified as necessary to curb its use in adulteration of petroleum.

The Energy Regulatory Commission (ERC), however, did not factor this tax into the new monthly retail prices it announced yesterday, raising the cost of kerosene to Sh50.80 from Sh46.98.

Kerosene is mostly used by low-income earners who will henceforth part with more to purchase the fuel popularly used to cook and light homesteads.

READ: Petrol prices rise with motorists expected to dig deeper on new tax

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Plastic bag tax

Mr Rotich has also extended the scope of plastic bags taxes, a move meant to bolster government efforts to protect the environment from degradation.

The Treasury in 2007 imposed a 120 per cent levy on plastic shopping bags but the law has now been changed to read “plastic bags and sacks”, essentially brining more polythene products into the tax bracket.

Traders, who have previously protested this levy arguing it raises the cost of doing business, are in for a rude shock even as environmentalists celebrate.

Thursday also marked the re-introduction of a 20 per cent excise duty on importation of motor-vehicles as opposed to the fixed fee of Sh150,000 for cars aged less than three years and Sh200,000 for those older than three years.

The new valuation formula caught importers of high-end vehicles aged less than three years by surprise as they were immediately required to pay significantly higher duty beginning last Friday morning.

“Imported vehicles which were cleared on Thursday were taxed based on the old rates that relied on age,” the secretary-general of the Kenya AutoBazaar, Charles Munyori, told the Business Daily.

Mr Munyori said individuals whose expensive, relatively new vehicles such as Toyota V8 were cleared Friday morning were asked to pay excise duty of Sh1.1 million — representing a steep and sudden increase from the previous Sh200,000.

Mr Rotich also re-introduced a six per cent withholding valued added tax (WHVAT) after Parliament removed it through the Tax Procedures Act (TPA) last December.

This means that suppliers of goods and services to government and large companies, which were the initial target of the levy, will not escape it as they had expected after the TPA was enacted.

The new law is applicable from January 19 this year although the amendment was done only last week, meaning the minister intended it to apply retrospectively.

“I don’t see how that law is going to apply from January, yet it has just been made. Lawyers are going to question this given that it is never fair to apply a law retrospectively,” said George Maina, a tax expert at consulting firm Rodl & Partners.

Mr Maina said some taxpayers were in the process of challenging the application of the tax despite its deletion from the VAT law through the TPA.

Robert Waruiru, an associate director with KPMG, said applying a law retrospectively poses the prospect of subjecting the Treasury and the KRA to allegations of unfair administrative action.

“The fundamental question that a court would need to consider is whether a taxpayer can be expected to have known of an amendment with an effective date of January 19, 2016 before June 8, 2016 when the amendment was gazetted,” he said in a commentary appearing in this publication yesterday.

Another tax expert questioned the logic behind ambushing taxpayers with instantaneous levies as opposed to giving them a chance to “submit written comments or speak at hearings before final tax laws are enacted”.

“If Kenyans are meant to comply and pay their taxes, why make the Finance Bill a secret document? Why not make it available to the public before the Budget Speech,” Joseph Thogo, a tax expert with Deloitte, posed in his regular column in the Business Daily yesterday.