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Opinion & Analysis

VAT Act will undermine the economy

Former permanent secretary, Ministry of Information and Communication, Bitange Ndemo. Photo/FILE
Former permanent secretary, Ministry of Information and Communication, Bitange Ndemo. Photo/FILE 

The New VAT Act is causing untold damage to the economy.

At a Masters in Entrepreneurship class at the University of Nairobi’s Business School, where I have just paired my graduate students with Digital Opportunity Trust (DOT) youth entrepreneurs to nurture ideas, we are waking up to the harsh realities of the new Act.

Peterson Macharia an apprentice at DOT and a nascent poultry farmer from Nyeri is narrating his experience.

Prior to the Act, his profit margins were 30 per cent but today he says “is down to less than 15 per cent”.

VAT pushed up the cost by an additional Sh600 per a 90 kilogramme bag of feed that he needs each day to feed his 800 day-old chicks. It is difficult enough to vaccinate these little birds that look alike but when government pushes the cost up, it sends confusing signals making it even harder and disappointing.

A graduate of electrical engineering from Egerton University Macharia wants to succeed but feed suppliers stand on his way with fake feed and that means he will spend more on feed to meet market requirement. He wants government to regulate the feed manufacturing industry that has been invaded by unscrupulous businessmen.

Where are the ethics? He asks.

DOT, a Canadian NGO and a leading international social enterprise organisation harnesses the potential of young people and transforms them into leaders by facilitating technology, business, and entrepreneurial training has given Macharia and his peers adequate training but they are all in agreement that more needs to be done and change the society to embrace modern business ethics to enable sustainable development.

What is the real impact of this new fiscal policy? A student asks. At micro level, if input price increases, new enterprises will not survive but more importantly and at macro level, products from other countries especially those that provide subsidies to their farmers become cheaper and displace local producers. I responded. Adding that when the local market is flooded with cheap foreign goods, the local industry collapses.

Government collects no taxes from a dead industry. This is what precisely happened to our textile industry when the market was flooded with cheap used clothing (mitumba) leading to massive unemployment or underemployment and poverty.

So like Macharia the new and prospective entrepreneurs from the Sh6 billion Uwezo fund will find it difficult to grow an enterprise where the fiscal policies have enabled foreign firms to compete effectively.

Indeed for the past few months poultry farmers have had problems selling their eggs past Sh10 mark for each egg in spite of input cost going up. This enabled the South African eggs to come into the market at a lower cost.

After class, I head for a fundraiser to help a young girl undergo open heart surgery. Here again the master of ceremony says their target has changed since the introduction of VAT on devices. She needs a mechanical valve. This forced me to peruse the Act and the Kenya Revenue Authority’s Simba system.

Indeed there are exemptions to communicable disease medicines as well as other luxury items such as helicopters. Most of the non-communicable diseases such as cancer, diabetes, high blood pressure medicines as well as medical devices are not exempt.

Paediatric open heart surgery is in most cases associated with rheumatic heart disease which is prevalent among the poorest of the poor. It therefore defeats logic to exempt helicopters and fail to recognise the plight of the poor.

I suppose this was an oversight on the part of Treasury for failure to cushion the poor and creating an enabling environment for youth enterprise to flourish which is a sure recipe for disaster.

Unemployment and under-employment is a serious problem in this country that we should not allow any policy that would favour foreign firms especially in the agriculture sector to set foot in the country.

It is our collective responsibility to ensure Macharia and his peers do not drop into the chasm of poverty and crime. Input cost should be zero rated. There are other sources of revenue.

Automation for example, can raise more money from the rich who evade the tax than taking measures that will undermine the economy. Like most countries we must provide subsidy to hard working youth entrepreneurs. It will be less costly in the long run and more revenue to the government.

The writer is a senior lecturer, University of Nairobi and a former permanent secretary, Ministry of Information and Communication.

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