Rotich’s budget comes with hidden consumer tax pain
Treasury secretary Henry Rotich poses outside his office before heading to Parliament to present his Budget on June 8, 2015. PHOTO | DIANA NGILA
What you need to know:
Tax experts said adjusting the tax rate for excisable goods would lead to a general rise in the cost of basic services and commodities such as mobile phone airtime, fruit juices, mineral water and shopping bags, even as it adds billions to the taxman’s coffers.
Motorcycles, food supplements, jet fuel, diesel oil, fuel oil, tobacco products and alcoholic beverages, which are listed as excisable goods, will also be subject to the tax adjustment.
The move comes despite recent calls by producers of excisable goods that the inflation adjustment be postponed, citing its enactment late last year which left the market little time to absorb its impact.
The Treasury yesterday confirmed that excise duty will next month be adjusted for inflation as provided for in last year’s Finance Bill, making it a hidden source of tax pain that the minister, Henry Rotich, chose to say little about on Wednesday.
Mr Rotich, the Treasury Secretary, largely steered clear of the provision that is expected to be the biggest source of pain for consumers every year and in the long term — leaving the impression that his budget was mwananchi-friendly.
Tax experts said adjusting the tax rate for excisable goods would lead to a general rise in the cost of basic services and commodities such as mobile phone airtime, fruit juices, mineral water and shopping bags, even as it adds billions to the taxman’s coffers.
The Excise Duty Act, which came into force last December, provides for annual review of the levy based on the average monthly inflation rate for the preceding financial year.
That means this year’s adjustment will be based on the average inflation rate for the period between July 2015 and June 2016.
The average rate of inflation for the past 11 months is 6.5 per cent, a reality that has already been factored into the cost of living for ordinary Kenyans but will once again be loaded onto consumer prices and ultimately form the base for next year’s revision.
Mr Rotich yesterday confirmed that the measure would apply starting July 1.
“I mentioned in my budget speech yesterday that the normal adjustments in excise duty would take effect on July 1. That is in line with the law that was passed last year. It is now up to the Kenya Revenue Authority (KRA) to publish the new rates as I outlined in the budget,” he said.
Motorcycles, food supplements, jet fuel, diesel oil, fuel oil, tobacco products and alcoholic beverages, which are listed as excisable goods, will also be subject to the tax adjustment.
The move comes despite recent calls by producers of excisable goods that the inflation adjustment be postponed, citing its enactment late last year which left the market little time to absorb its impact.
The expectation is that prices of goods affected by the excise duty will go up in line with the inflation adjustment.
The price increment would begin on the factory floors, with manufacturers factoring in the higher cost of raw materials in the products before passing on the same to the consumer in the form of higher prices.
Wealthier Kenyans importing motor vehicles are, however, going to be spared the pain of inflationary adjustment after the minister removed the specific rate of excise duty and introduced an ad-valorem rate of 20 per cent based on the value of the vehicle.
Under the former tax plan, an adjustment of 6.5 per cent on the Sh200,000 excise for cars aged more than three years would have seen the importers pay an extra Sh13,000, while those paying an excise duty of Sh150,000 for newer cars would fork out an extra Sh9,750.
Questions, however, remain on the effective date of the adjustment, which by the Act is supposed to kick in on July 1.
Mr Rotich indicated that the inflation adjustment, as well as the new excise taxes proposed in the budget, will take effect as provided for in the Act.
Such amendments are, however, passed in the Finance Bill, which was yet to be tabled in Parliament, and is usually passed several months into the fiscal year.
“The law is very clear on the timelines within which laws touching on taxation should be passed. We will work within the timelines set in law,” said Mr Rotich without further elaboration.
One way of ensuring that there is no confusion would be to rush the Finance Bill through Parliament, but going by past practice it remains unlikely that the Bill will pass before the end of the current fiscal year.
“We have to hope that the Finance Bill comes out before July 1. If not it will create a problem in implementation,” said Deloitte associate director Lilian Kubebea.
The inflation adjustment, already in use in neighbouring Tanzania, is seen as one of the ways to help the KRA achieve its revenue target at a time when the taxman is struggling.
The taxman is expected to collect Sh1.5 trillion in the next financial year, including appropriation-in-aid (AIA), up from this year’s Sh1.295 trillion.
The KRA collected a total of Sh888.1 billion in the 10 months to April against a target Sh1.215 trillion for the financial year, leaving it with a Sh327 billion gap to be filled in May and June.
Newly introduced taxes on kerosene and cosmetics will, however, not be subjected to the inflation adjustment, given that they are coming into force at the same time as the inflation adjustment.
“The schedule in the Act capturing the duty was quite specific, meaning the inflation adjustment will take effect on items that were listed in it,” said Ms Kubebea.
Mr Rotich introduced excise duty on kerosene at Sh7,205 per 1000 litres, aiming to cut down its use in adulteration of motor vehicle petroleum, while the duty on cosmetics has been pegged at 10 per cent.
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