Tax measures signal pain for consumers

Treasury Cabinet secretary Henry Rotich outside the Treasury building June 13, 2013 before he read the Budget statement in Parliament. Photo/ANN KAMONI

What you need to know:

  • Treasury secretary reveals intention to bring back controversial VAT Bill, levy on imports to finance railway.
  • The tax measures are being brought into force with the advice of the International Monetary Fund (IMF) seeking to seal avenues of revenue leakage.  

Treasury secretary Henry Rotich on Thursday presented to Parliament a Budget statement that signalled President Uhuru Kenyatta’s determination to meet some of the lavish promises he made on the campaign trail with the introduction of new tax measures to finance them.

Mr Rotich told Parliament that he was reintroducing the controversial Value Added Tax (VAT Bill) that his predecessor Njeru Githae was forced to drop late last year amid opposition from Members of Parliament and consumer groups and introduce a capital gains tax nearly two decades after it was shelved.

The VAT Act repeal Bill, which intends to end the regime of tax exemptions and zero rating, came under stiff opposition for its possible impact on the prices of basic consumer goods that are critical to the survival of the poorest households such as maize floor, milk and bread.

The tax measures are being brought into force with the advice of the International Monetary Fund (IMF) seeking to seal avenues of revenue leakage.

Mr Rotich also announced a tightening of measures to enforce the collection of property and corporate tax laying responsibility for the first time on individual corporate managers for tax evasion.

In yet another move that portends a general increase in consumer goods prices, Mr Rotich announced the introduction of a new levy on all imports, whose proceeds will go financing the development of the railway infrastructure.

All imports will now be charged a 1.5 per cent Railway Development Levy on top of the import duty – a cost that consumers will bear in enhanced prices on the retail shelves. 

Amendments to the existing tax laws aimed at raising revenues are expected to be brought before the house in the coming weeks.

Tax experts warned that the Budget statement was so scanty on details that it would be inappropriate for anyone to celebrate just yet.

Nikhil Hira, a tax partner at Deloitte, said the budget speech had largely restated policies announced last year, adding that full details of how the government plans to raise the huge revenue bill will be known once the relevant Bills are published.

“It is clear the government is looking for new ways of raising money to finance the huge budget,” he said, adding that the full burden on taxpayers will be revealed in the Finance Bill 2013.

The government expects its revenues and grants in the new fiscal year to hit Sh1.2 trillion against total expenditure of Sh1.6 trillion, leaving state coffers with a massive deficit of Sh356.9 billion.

Key budget busting programmes that the government has lined up for the next financial year include the provision of free maternity services and a laptop for every Standard One pupil.

The large budget deficit comes at a time when government revenues continue to trail collection targets, lending urgency to the planned introduction of new levies, a tightening of tax compliance measures and scaling back tax exemptions.

Mr Rotich said the government expects reforms to the VAT code to raise Sh10 billion additional revenue, way below the earlier expectation of Sh60 billion increment, signaling that some of the existing exemptions to the consumption tax will remain.

Treasury officials have previously indicated that the government loses between Sh40 and Sh60 billion in VAT exemptions and was keen on sealing the loophole to narrow down the deficit.

There has been strong opposition to the introduction of VAT on items such as processed milk, bread, and farm inputs and the government appears to have settled on partial abolition of the exemptions.

“The lower target is in an indication that Treasury will maintain a significant number of current VAT exemptions to avoid rejection of the Bill in Parliament,” said David Wanyoike, a tax consultant at Ernst & Young.

Mr Rotich promised to re-table the VAT Bill with a view to “simplify, modernize and reduce cost of compliance.”

Aside from essential goods, VAT exemptions also apply to raw materials and imported machinery used in the manufacture of export goods.

VAT accounts for a quarter of all tax collections annually and is the second most important revenue source for the government after taxes on income and profits. In the ten months to April, total tax income stood at Sh587.9 billion, falling behind the target of Sh817.4 billion.

Total revenue collection in the period, including grants, stood at Sh861.9 billion or 72 per cent of the Sh1.2 trillion targeted. The lower-than-expected revenues come ahead of the new fiscal year whose expenditure is the largest at Sh1.6 trillion.

It remains to be seen to what extent the government will remove the VAT exemptions which interest groups led by the Consumer Federation of Kenya (Cofek) say will fuel inflation and hurt low-income households the most.

Mr Korir emphasised the expansion of irrigation-based agriculture as a way of reining in inflation which the Treasury expects to remain with the bound of five to seven per cent in the new fiscal year.

The cost of living stood at 4.05 per cent last month but is expected to rise on the introduction of an additional 1.5 per cent levy on all imports. The levy will automatically inflate the cost of goods consumed in the economy, adding another layer of pricing on finished goods.

The value of monthly imports stands at an average of Sh110 billion, implying that the new levy will see the government collect about Sh2 billion per month.

Landlords, whose rental income has remained untaxed for decades, have also moved closer to the tax bracket with Mr Rotich directing the Kenya Revenue Authority to double its efforts in enforcing compliance in the real estate market.

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