Kenyan consumers, struggling to cope with double digit inflation, will have to bear a fresh increase in food prices in the coming weeks if Parliament accepts the Treasury’s plan to remove tax exemptions on essential commodities.
Milk, cereals and edible oils top the list of consumer goods whose prices will rise by wide margins with the imposition of Value Added Tax (VAT) as proposed by Finance minister Njeru Githae in his Budget speech.
Milk processors said prices of dairy products will rise by equal margins once the VAT Bill is enacted into law. Grain millers promised to follow suit by passing the tax burden to consumers.
“The prices will go up, but not to the levels last seen during the drought,” said Peter Wasonga, marketing manager at Brookside Dairy.
VAT is charged at the rate of 16 per cent, and the prices are likely to rise by up to Sh6 per half a litre pouch.
The processors said the price increases could come as early as July 1 when the new fiscal year starts, but the VAT Bill is yet to be slotted for debate in Parliament.
“The VAT Bill still has a long way to go since it will have to be discussed by Parliament. We may see actual implementation next year,” said Steve Okello of PwC.
“Unlike the Finance Bill, which comes to effect at specified dates, the VAT Bill is being repealed and will have to go through the floor before it is approved,” said Peter Kinuthia of Ernst and Young.
A 500ml packet of milk is retailing at Sh35, down from between Sh45 and Sh50 in April when a prolonged drought hit parts of the country.
A two kilogramme packet of maize meal is selling at between Sh97 and Sh120, depending on the brand.
When the tax comes into force, a packet of maize flour could cost Sh16, rising to levels last seen in December 2008.
Diamond Lalji, the chairman for Cereals Millers Association (CMA), said the new rules would hurt the milling industry by discouraging consumers from buying sifted maize meal to avoid high costs.
“Any cost increases arising from the VAT Bill will be passed on to consumers,” Mr Lalji said on telephone.
The government hopes to collect Sh42 billion through imposition of VAT on nearly all consumer goods if Parliament backs the proposal to end tax exemptions.
The Finance minister has already published the Bill, but its enactment depends on how fast MPs - with a loaded legislation calendar can debate and approve the Bill.
Treasury’s intention to remove zero-rating of foods to VAT is driven by the need to bring clarity in the tax system and do away with the burden of paying refunds to the manufacturers of the products that have over the years accumulated to a backlog of more than Sh18 billion.
Prices of food, electricity, newspapers and books will go up once the VAT Bill 2012 is passed and assented to by the President.
Removal of the exemptions is also driven by the Treasury’s view that benefits accruing from tax waivers are not being passed on to consumers.
Tax experts say that while the VAT Bill 2012 is less complex, its introduction would push the cost of essential products by between 10 per cent and 16 per cent.
“It may end up pushing up prices on some basic goods, hurting the common person,” said Nikhil Hira, a tax partner at Deloitte & Touche.
VAT, a consumption tax, contributes 29 per cent of total revenues in Kenya. Collections from the tax in developed countries lies at between 35 per cent and 40 per cent.
The Consumers Federation of Kenya (Cofek) said all stakeholders should be consulted before the exemptions are removed.
“We support Treasury’s intentions to raise revenue but not by targeting the poor,” said Stephen Mutoro, the federation’s chief executive officer.
The Bill proposes to charge raw materials, previously spared consumption taxes, VAT at the standard rate of 16 per cent, effectively pushing up the prices of essential commodities.
The Bill has proposed removal of rebates offered by the Treasury that has seen some manufacturers pay VAT at the rate of 12 per cent, four per cent lower than the standard rate.
These include segments like retail power tariffs and hotel services. Other consumer goods targeted include animal feeds and textbooks.
Other items such as cooking gas which fall in the category of zero-rated products are also set to attract full tax payment.
However, products meant for export or used by the diplomatic corps would continue to enjoy the zero rate.
Under the old exemption rule maize, rice, wheat, sugar, milk, edible vegetable fats and oil, fertilisers and pesticides were among 12 goods that were VAT exempt.
The Treasury expects the new VAT law to be in place early in the fiscal year, clearing the way for the taxman to collect billions in additional revenues.
With the coming into force of the new VAT law prices of staples like wheat, maize, sugar and rice as well as agricultural inputs, pharmaceuticals and educational materials are expected to go up.