Consumers will pay at least Sh14 more per litre of milk beginning next month in a fresh round of retail price inflation linked to President Uhuru Kenyatta’s assent to a Bill that introduces tax on dairy products.
Cooking gas, electricity, exercise books, text books and mobile phones also attract a 16 per cent tax charge under the VAT Act 2013, signalling that their prices will rise by a similar margin.
The goods were previously zero-rated but have now been migrated to the tax bracket, meaning that Kenyans will dig deeper into their pockets to access them.
Under the current 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 consumers will pay higher monthly bills beginning next month as the new law has imposed a 16 per cent tax on all electricity consumption.
Also in the list of taxable supplies that have been excluded from VAT but will now attract the charge at the rate of 16 per cent are fertilisers, farm chemicals, computer hardware and software.
Imposition of the consumption tax on these goods is expected to come as a surprise to many consumers who were made to believe that Parliament’s loud opposition to the tax had forced the Treasury to drop it.
The VAT Act 2013 comes into force by October — its effective date having been set at within a month from the date of publication in the Kenya Gazette. The Act could be gazetted as early as next week.
The Bill was debated and hurriedly passed on the night of August 6, 2013 before lawmakers went on a month’s recess. Mr Kenyatta put his signature to the Bill last Wednesday, effectively making it an Act of Parliament.
Dairy processors promised to pass any additional cost arising from the new tax measures to consumers.
The new VAT law only lists ‘unprocessed milk’ — which is raw milk — as tax-free; meaning that all processed dairy products such as pasteurised milk, fermented milk, long life milk, yoghurt, milk powder, butter, cheese and ghee have been put in the tax bracket.
New KCC chief executive Kipkirui arap Lang’at expects the tax measure to slow down the sale of processed dairy products sales, push low-income households from the formal milk market and fuel milk hawking.
“This burden will be borne by consumers. Higher milk prices will see many consumers stop taking milk or cut consumption, negatively affecting growth of the dairy industry,” said Dr Lang’at in an interview.
A 500 ml packet of milk currently retailing at Sh45 could cost as much as Sh52 beginning next month.
The new VAT law drastically scales down the number of zero-rated and tax-exempt goods from more than 400 to about 100.
Treasury secretary Henry Rotich has said that the government plans to raise Sh10 billion annually from the tax measures spelt out in the new VAT law.
“There will be a continuous progression of price hikes and the cost of living will go up considerably,” said John Thindi, a tax director at PKF East Africa.
“The tax measures on farm inputs will lead to increases in food prices making it harder to attain food security and proper nutrition.”
The rise in cost of fertilisers and pesticides comes after a 1.5 per cent levy was imposed on all imports to fund the construction of a standard gauge railway line between Mombasa and Kigali.
Parliament defended its decision to include the essential goods in the list of VAT-able commodities saying ‘basic goods’ was a relative term.
“The goal was to reduce the complications in implementing the previous law,” said Benjamin Langat, who chairs the parliamentary committee on Finance, Planning and Trade.
“We expect the government to use the tax revenues to target the poor through initiatives such as cash transfers to vulnerable groups.”
The new law exempts fuel and fuel oils from VAT for a period of three years after which they will automatically pay the tax at the rate of 16 per cent.
Mobile phone makers have already said they will increase handset prices by 16 per cent in line with the new law.
The handset makers fear the price increase will hamper the transition from feature phones to smartphones and limit uptake of digital content.
“Higher mobile phone prices will act as a barrier to entry and lead to slower penetration growth,” said Jussi Hinkkanen, Nokia vice-president in charge of corporate relations in India, Middle East and Africa.
“It offers short-term revenues for the government but in the long run, tax benefits which would have originated from accelerated economic performance related to higher penetration will be foregone.”
For example, the price of an entry-level smartphone such as the Ideos Ascend Y-100, which currently retails at Sh5,999, will go up by Sh960 to Sh6,959.
Mr Kenyatta, during his tenure as Finance minister, exempted mobile phones from VAT in the 2009 Budget speech, as a strategy to deepen use of mobile phones and related services such as mobile money, m-commerce and apps development.
The VAT tax break resulted in Kenya’s total mobile subscribers almost doubling to 29.8 million users as at March this year from 17.4 million in June 2009, data from the Communication Commission of Kenya show.
Studies by the World Bank show that a 10 per cent growth in mobile subscription yields an estimated 1.2 per cent growth in GDP across the economy. Further, the number of Internet users grew fivefold to 16.4 million compared to 3.6 million in June 2009.
A July study by Ipsos Synovate showed that Kenyans are opposed to VAT on essential goods, saying it will exacerbate economic conditions that have worsened since the Jubilee Coalition took power in March this year.
Nine out of every 10 Kenyans said they were against plans to levy VAT on basic commodities and services such as milk, exercise books, cooking gas and electricity. They argued the tax will increase the cost of living and hurt the majority poor.