Economy

House team defies IMF with plan to change Bill on VAT

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Farmers deliver milk to a New KCC depot in Eldoret. Finance Committee has accepted to forward changes on zero-rating of agricultural machinery and processed milk in the VAT Bill to Parliament. Photo/FILE

The Parliamentary Committee on Finance is set to propose amendments to the Value Added Tax (VAT) Bill to reinstate zero rating of agricultural equipment as well as processed milk.

This could signal the beginning of the mutilation of the Bill, which is part of the economic reforms agreed upon with the International Monetary Fund.

During a committee hearing at Continental House in Nairobi Tuesday, MPs bowed to stakeholder pressure and agreed with proposals put forward by the tax advisory firm PricewaterhouseCoopers (PwC) and the Kenya Dairy Board (KDB).

Several other institutions have also made proposals for the VAT Bill to be changed, saying it would make the cost of living high since it would impose a 16 per cent surcharge on prices of nearly all goods and services including those consumed by the poor.

READ: Farm inputs tax to cut production by half, warn traders

The IMF, which has lent Kenya $750 million on condition of several reforms including removal of zero-rating and exemption from the VAT regime, wants the Bill passed to save Sh40 billion lost every year to the zero-rating and exemptions.

READ: IMF pushes for wider VAT net to boost tax revenue

The government already faces revenue collection shortfall of Sh49 billion in the first quarter of this fiscal year with VAT collections falling behind target by Sh13 billion.

Kenya Dairy Board managing director Machira Gichohi told the committee that milk processors want to be exempted from paying VAT when importing machinery and equipment.

He said investors in the processed milk sector would be discouraged by having to pay VAT on equipment which they have to import, since this would raise the cost of production.

“We have grown the dairy industry from just 2.8 million litres a decade ago to five billion litres currently. We should not place roadblocks for the industry by passing the Bill without amending it,” said Mr Gichohi.

The KDB boss said zero-rating raw milk and imposing 16 per cent VAT on the processed form would only serve to encourage hawking of milk.

Committee chairman Chris Okemo said members had elected to propose that the House passes the Bill with specific amendments.

“What we will do is change the offending clauses in the Bill. We will keep the status quo and amend in future what will remain. That is what I will be comfortable with,” he said.

Mr Okemo, who is himself a former Finance minister, said the committee had to choose between not dealing with the Bill in the current Parliament and making changes to it before passing it.

“We will pass the Bill with the amendments to keep these goods zero-rated but the dairy board has also to show that it is expanding the areas from which milk can be collected and processed,” said Kibwezi MP Philip Kaloki, a member of the committee.

On the sidelines of launching Pre-Budget hearings two weeks ago, Finance minister Njeru Githae said he would not advocate the amendment of the Bill to keep foodstuff or agricultural inputs zero-rated because there were other ways to ameliorate the conditions of the poor.

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