Tax reforms set stage for higher consumer prices

Prices of consumer goods are expected to rise steeply if Parliament passes an International Monetary Fund-sanctioned Bill to scrap all the tax rebates that the Treasury has been offering manufacturers.

The proposals, contained in the Value Added Tax Bill 2011, seek to repeal tax laws by removing inputs which enjoy exemptions and those that are charged VAT at the rate of 12 per cent instead of the official 16 per cent.

They also seek to phase out refunds for most of the intermediate goods.

The measures should have far-reaching impact on the consumers and could turn into a political as well as social time-bomb — especially in an election year.

Missing conspicuously from the new VAT exemptions list are the highly-sensitive flours — both maize and wheat — and animal feeds that will attract 16 per cent VAT if the law is passed.

Textbooks, wooden coffins and charcoal are some of the most commonly used items that enjoy exemptions (VAT exclusion) but will be struck out under the new regime.

“Ultimately, all these costs will be passed on to the consumer with devastating consequences on retail pricing at a time of high level inflation,” said John Gikima, a tax associate at Ernst & Young.

Headline inflation rose rapidly from about five per cent in April to 18.91 per cent in October, a challenge that the Value Added Tax Bill 2011 can only exacerbate.

Finance minister Uhuru Kenyatta was initially expected to present the Bill to Parliament in his June Budget after his earlier agreement with the IMF to undertake the reforms in return for the Sh50 billion foreign exchange support deal.

The changes aim at increasing tax revenues while simplifying taxation through the elimination of tax refunds.

Many, however, see them as the product of the IMF’s come-back to the centre of Kenya’s fiscal and monetary policy-making after nearly 10 years of strong growth that enabled the country to finance up to 90 per cent of its Budget through internally generated resources.

Kenya had promised in a letter of intent and a memorandum of understanding with the IMF to “review the VAT laws in the context of the 2011/2012 Budget to remove distortions introduced by a number of ad hoc exemptions and zero-rated goods that have undermined revenue collection.”

Manufacturing is particularly set to take a major hit as the six items that currently receive preferential VAT treatment at 12 per cent will no longer enjoy the preferential treatment.

Notable among the items that will be charged full VAT at 16 per cent are the electricity, furnace, diesel and other fuels used to drive machinery

Manufacturing growth decelerated to three per cent in the third quarter compared to 4.8 per cent in the second quarter partly because of high cost of production and inputs.