When the Tax Laws Amendment Bill tabled in Parliament in April this year proposing minor amendments to the Income Tax Act, Stamp Duty Act and the Value Added Tax Act, most legislators and commentators lauded it on its efforts to streamline the current tax regime.
The proposed amendments are reflective of the government’s Big Four Agenda proposing exemptions on stamp duty for first time home owners under affordable housing scheme. While the Bill did not propose any changes to the main body of the VAT Act, it proposes amendments of the First and Second Schedules to the VAT Act. The First Schedule deals with VAT exemptions of supplies whereas the Second Schedule provides for zero rating of supplies.
In effect the Bill has proposed to increase the number of VAT exempt supplies by reclassifying select zero rated items to exempt supplies. On the surface the Bill sought to streamline tax management by eliminating the VAT refund system which has overtime resulted in an increase in funds owed to manufacturers and different categories of suppliers.
The Bill also sought to create new revenue streams for the government to bridge a growing funding gap and curb borrowing.The underlying implications of amendments on the VAT Act will however have far reaching implications on the average Mwananchi by pushing up the cost of essential household goods.To most people, Zero rating and VAT Exempt sound the same; their implications are however far much more detrimental to the end user.
Under tax law, suppliers of Zero rated items are allowed to claim input tax associated with their business and do not therefore pass the cost to the end user. On the other hand, Suppliers who only deal in exempt items are not allowed to claim input VAT incurred in the making the exempt supplies.
A supplier of exempt items is therefore not eligible to claim any input VAT in relation to the VAT incurred specifically in making such supplies, a cost that will no doubt be passed on to consumers. Zero rating has traditionally been the reserve of household consumer goods, agricultural inputs and medicaments.
The list of zero rated goods includes cooking gas, ordinary bread, maize (corn) flour, milk, fertilizers and agricultural equipment, water supply by public bodies and certain medicaments. Under the Tax Laws Amendment Bill all these items have now been classified as Tax Exempt in effect making them more expensive.
Going by the memorandum of objects and reasons contained in the Bill, the government’s main aim was to limit the number of zero rated items to mostly exports with a view to reduce VAT refunds made to businesses.
Evidently, no new supplies have been proposed for zero rating. As illustrated above, the proposed exempting of zero rated items will result in an increase in the price of those items since input VAT incurred in the production of those items will not be recoverable.
It is worth noting that the price of basic commodities such as milk, flour, ordinary bread and water supply by public bodies, cooking gas and certain medicaments will lead to an increase in the cost of healthcare and energy respectively which will work against the Government’s Big Four Agenda.
Further complicating the equation is the fact that the Government has indicated reintroduction of VAT on fuels used as raw materials in transportation and manufacturing. Consequently, the reintroduction of VAT on fuels will increase the cost of production of items in general further.
While the general argument within government has been that manufacturers and suppliers of zero rated items enjoy the benefits without passing the cost benefit to consumers, this is an administrative matter and should be treated as such.
It would be prudent to ensure that the current zero-rated VAT status of the items being proposed for exemption such as milk, flour, bread, cooking gas and water supply is not altered as a way of cushioning the common mwananchi against the ever-increasing cost of living.
Nzioka Muindi, Tax consultant, PKF Kenya.