Spotlight on MPs as Treasury’s bid to tax flour, books is debated

The battle for the minds and hearts of Kenya’s bottom millions is expected in Parliament this week as MPs open debate on the Treasury’s fresh bid to tax basic goods and services, risking a general rise in consumer prices.

(Read: Kenyans oppose VAT on basic food items)
Treasury secretary Henry Rotich has set the stage for round two of a battle his predecessor, Njeru Githae, lost by including basic commodities in the list of goods that qualify to be charged Value Added Tax (VAT).

The cost of food, medicines, electricity and agricultural inputs could rise sharply in the coming months if Parliament passes the VAT Bill 2013, which is to be tabled before it this week.

The government has in the past exempted these goods from VAT to make them affordable to millions of low-income consumers, but a copy of the Bill seen by the Business Daily shows that the Treasury has made a complete U-turn on the promise Mr Githae made to the 10th Parliament that it would spare the poor the pain of pricey basic goods and services through continued exemption from the consumption tax.

If passed without amendments, imported medical supplies and equipment, including human vaccines, will be charged VAT at the rate of 16 per cent, instigating a general rise in the price of medicines.

The taxman will make similar demands on ordinary paper and newsprint, setting the pace for a general rise in the cost of exercise books, newspapers, journals and periodicals. Families with young children will also dig deeper into their pockets to buy diapers, urine bags, and mosquito nets, among other sanitary materials if Parliament passes the Bill as proposed by Mr Rotich.

Martin Kisuu, the chief executive of Taxwise Consulting Limited, said the Treasury’s proposals mean that all food items will be taxable except in their raw state.

“Once processed into bread, flour, milk and rice products, they attract VAT,” he said on Friday after studying the VAT Bill 2013.

Mr Kisuu said that electricity bills will also rise as power joins the list of items that qualify to be VAT taxed at the top rate of 16 per cent instead of the current 12 per cent.

The taxman will also levy a 16 per cent VAT on agricultural inputs that are currently zero-rated with the exception of fertiliser, which remains exempted in the latest Bill though tax experts said the exemption will not shield the cost of this key farming input from rising.

“The real impact of this is to make fertilisers more expensive since the suppliers will no longer be able to recover VAT on their overheads and input costs,” said Mr Kisuu.

The Treasury, through the Value Added Tax Bill 2013, is also preparing to raid the aviation industry through imposition of new charges on aircraft landing and parking services.

The Bill, which the National Assembly through the chairman of the Finance, Planning and Trade Committee Benjamin Langat published on June 18, also opens the door for the taxman to rope into the tax bracket persons with diplomatic privileges who have been enjoying tax-free imports.

If the Bill passes unchanged, diplomats and persons who enjoy diplomatic privileges will only benefit from a one-off tax-free importation of goods upon entering Kenya.

The VAT Bill 2013 is also seeking to empower the Kenya Revenue Authority (KRA) to impose taxes on hides and skins and net additional revenue by taxing supplies intended for use in aid-funded projects that were exempted in the VAT Bill 2011. Business or users training and consultants providing services designed to improve work practices and efficiency of an educational organisation, including primary, secondary, technical college or university or institutions established for promotion of adult education, vocational training or technical education, will also be charged the tax if Parliament rubber-stamps the Treasury’s proposals.

Introduction of the Bill to Parliament sets the stage for a bruising battle between the Executive, which is seeking a review of the 1989 VAT Act, and consumers who are opposed to any attempts to tax basic food items.

MPs have in the past opposed the new tax measures, forcing the Executive to shelve a similar Bill published in 2011.

Consumer Federation of Kenya (Cofek) has since warned of a court battle should Parliament approve the Bill and the President assents to it.
Cofek secretary-general Stephen Mutoro has warned that consumers will stage street protests if the Bill is passed in its current form.

(Read: State targets cash transfers to ease VAT Bill impact)

“We will seek judicial intervention if the Bill is approved and assented to by the President,” said Mr Mutoro at a news conference a fortnight ago.

The federation has since written to Mr Rotich, President Uhuru Kenyatta, the International Monetary Fund boss and the United Nations special rapporteur on the right to food to protest plans to reintroduce the Bill.

Mr Rotich told the Budget and Appropriations Committee on June 13 that the Bill is a priority for the National Treasury as it was critical to the taxman meeting his revenue targets.

The Treasury has argued that the current VAT Act leaves room for massive revenue leaks that need to be sealed.

“The object of the Bill is to repeal and replace the existing Value Added Tax Act (Cap 476). It aims to address the challenges faced in the administration of the existing law by simplifying the law and thereby enabling taxpayers to comply with ease,” the Bill says in its memorandum of objects and reasons.

It also seeks to spur adoption of the information technology in the administration of tax regime and advancements that have been made in business environment while taking into account international best practices.

“This is expected to reduce costs related to the administration and compliance while raising the revenue obtained from value added tax,” the Bill says.

The Bill confers powers on the cabinet secretary to vary the rate of tax and exemption of supplies of goods or services that are zero rated from tax.

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