Households face deeper VAT pain as egg, bread prices up

Breakfast, that all-important first meal of the day, has just become more expensive in Kenyan households after retailers increased the cost of bread and eggs in a fresh round of price surges attributed to the newly enacted value added tax (VAT) law.

A spot check at Nairobi’s retail outlets Monday showed that the price of a 400-gramme loaf was up Sh7 despite its listing in the new VAT Act as a tax-exempt consumer good.

Bakeries argued that inability to claim VAT expenses incurred in the production of bread had left them with no option but to pass on additional costs to the consumer — revealing the extent of the confusion that continues to dog enforcement of the new law.

VAT Act 2013 lists three types of bread as exempt from taxation — ordinary, gluten and unleavened — leaving bread makers with the headache of defining what is ‘ordinary bread’ given the multiple varieties of bread products in Kenya.

Egg prices also increased 25 per cent at the weekend to Sh15 a piece or Sh450 per crate, as poultry farmers factored in higher feed prices brought about by the removal of animal feeds from the list of zero-rated items.

“When wheat flour and animal feeds were zero-rated, manufacturers would lodge a claim to recover VAT incurred during production. These costs now have to be passed on to consumers,” said Samuel Mwaura, a tax director at Grant Thornton Kenya.

“There is also no definition in law as to what ordinary bread is.”

(READ: Tough time for consumers as Treasury rolls out VAT law)

The market is divided as to whether ordinary bread refers to the traditional white bread or includes variants such as brown, sweet, milk, sandwich and wholemeal bread among others.

“We are not sure what ordinary bread entails. We are waiting for price guides from suppliers to see whether the products are VAT-exempt or not,” said Willy Kimani, the business development manager at Naivas Supermarkets.

The vendors are also not clear on how to treat other bakery products such as buns, swiss rolls, wraps, baguettes, crumpets, croissants, doughnuts and ciabatta that have recently gained popularity in Kenya as convenient breakfast options that can be consumed on-the-go.

The pain of higher bread and egg prices will be borne by Kenyan households already saddled with the recent introduction of a VAT charges on essential goods such as processed milk, cooking gas, electricity, exercise and text books as well as mobile phones.

(READ: Milk and books to cost more as VAT Bill signed into law)

It appears that the new VAT law reserved its biggest blow on household budgets for the breakfast table — which accounts for more than one third of the daily spend on food.

Treasury secretary Henry Rotich has said the government plans to raise Sh10 billion annually from the new tax measures.

The new consumption tax law has hit the entire breakfast chain – pushing up the cost of all that is needed to make it including fresh supplies such as milk and bread – and the energy needed to prepare it in electricity, kerosene and gas costs.

This means that low-income households may have to skip breakfast – the most important meal of the day according to nutritionists – as the ripple effects of the VAT law begin to be felt.

Most Kenyan households consume tea and bread as their first meal of the day. Middle class families, however, prefer healthy alternatives such as brown and wholemeal bread, and cereals, mostly taken with milk. 

The rise in food and fuel prices is expected to push Kenya’s inflation rate to double-digit levels, given that food, electricity and petroleum are key consumer price index drivers.

Kenya’s headline inflation rose to 6.67 per cent in August from 6.02 in July, which is way above the Central Bank of Kenya’s target of keeping it at five per cent and below.

A general rise in the cost of living or inflation means consumers have to spend more to acquire the same amount of goods.

A July study by Ipsos Synovate showed that nine out of every 10 Kenyans are against plans to levy VAT on basic commodities and services such as milk, exercise books, cooking gas and electricity.

They argue that the tax will increase the cost of living and hurt the poor, exacerbating the tough economic conditions that have only worsened since the Jubilee Coalition took over power in March this year.

The Consumers Federation of Kenya (Cofek) has called off a protest march it had called Tuesday to show disapproval over the VAT Act after the lobby met Treasury officials and reached a deal to have the new law amended to cushion the poor.

Stephen Mutoro, Cofek secretary general, Monday brokered a deal with legislators, Economic secretary Geoffrey Mwau and Competition Authority of Kenya director-general Wang’ombe Kariuki to table changes on the legislation which has led to massive price increases for essential goods.

In the meantime urban households will be hard hit by the introduction of VAT on cooking gas and domestic electricity consumption, while rural consumers will take a thorough beating from the increase in kerosene prices.

A loaf of bread is now retailing for as high as Sh48 up from an average of Sh42 last month. The price of a half-litre packet of fresh milk has skyrocketed to Sh55 compared to Sh45 before the VAT law took effect on September 2.

The situation is further compounded by the energy regulator’s decision to increase the prices of kerosene, diesel and petrol, which is likely to lead to higher costs of living.

Kerosene has from Sunday been retailing at Sh85.56 up from Sh83.93 in Nairobi, hitting hard poor households that depend on it for lighting and cooking.

The increase in diesel prices is likely to push up the costs of transport and electricity given that thermal power constitutes a third of Kenya’s energy basket.

Kenya Power has already signalled higher electricity charges beginning end of this month, citing fuel price hikes and VAT, further compounding the situation for Kenyan consumers.

Under the new VAT law, electric supply to domestic households consuming less than 200 kilowatt hours was tax-exempt even as those consuming more than 200kwh per month were charged VAT at the rate of 12 per cent.

All households will from this month pay a 16 per cent tax on all electricity consumed and Sh0.36 more or Sh5.43 per unit of consumption in fuel levy charges. Inflationary stress may exert pressure on the Kenyan shilling, which currently stands at Sh87.58.

Millers have warned that the price of wheat is likely to go up given that Kenya, a net importer of the cereal, charges a 10 per cent import duty and 1.5 per cent railway development fund levy.

Wheat and wheat flour were previously zero-rated but are now exempt, meaning millers are incurring higher input costs as they cannot claim refunds.

“We have not reviewed our prices yet. However, these costs will have to be passed on to consumers,” said Diamond Lalji, chairman of the Cereal Millers Association.

“The best way forward would be to remove the import duty on wheat.”

Kenya imports 70 per cent of her annual wheat consumption estimates at about one million tonnes.