Why proposed tax laws have great impact on cost of living, key services

What you need to know:

The exemption of maize and wheat flour, milk, LPG gas and medicaments will increase their cost since suppliers in these industries will not claim for a refund on the VAT suffered on their purchases.
They will pass this VAT as a cost to the final consumer. This will negate the very reason why they were zero rated in the first place.

Two months before Thursday’s reading of the budget statement in Parliament, Treasury secretary Henry Rotich submitted the Tax Laws (Amendment) Bill, 2018 — putting in motion a raft of reform measures with potential immense impact on the cost of living.

The Bill, which has since gone through the first reading and committee stage, is expected to be presented for debate soon.

It contains a raft of measures, including introduction of withholding tax on winnings from betting and gaming, increasing relief for home ownership and exempting some products that were initially zero rated by the VAT Act 2013.

The proposed changes have a great magnitude on the cost of living and the regulation of the betting industry that has ballooned in recent years. First, the Bill seeks to amend the Income Tax Act by introducing a withholding tax (WHT) of 20 per cent on winnings received by persons from betting and gaming.

Kenya has become a betting paradise and figures from the Betting Control and Licensing Board (BCLB) are mind boggling. Data from BLCB shows that in 2015, betting and gaming operators netted an income of Sh19.43billion out of which they paid out winnings of Sh14.96 billion.

This caught the attention of the taxman and WHT was introduced in 2015. However, this did not take off as implementation of the tax became an uphill task. This was shelved.

In 2016, the returns skyrocketed to Sh97.83bn out of which Sh81.66bn was paid out to winners. The government in response introduced a tax of 35 per cent on the gaming and betting operators’ revenue. There was an uproar in the sector which saw the operators withdraw from sports sponsorships and charities in a bid to force the government to back down.

The government has given in hence the proposal to reduce the tax on the operators to 15 per cent and introduction of the WHT on the winnings. While it is clear that the industry has to be taxed, some of the questions that arise are on the fairness of the tax and the practicability of implementing the tax.

It should be noted that before the punters win from the bets and games, they would have suffered losses in the past. Therefore in the interest of fairness, KRA should impose the tax on the income received by the punters as opposed to the winnings. One of the proposals put forward is that on an analysis is done on the winnings and losses on a monthly basis and WHT be charged where the difference is positive.

Further, the WHT should be imposed on income above a certain threshold. Winnings come in all amounts from Sh20 to millions. Accounting for the WHT on such small amounts is not tax efficient and hence a threshold should be introduced. In addition, a greater percentage of the recipients of the winnings are individuals, some of who do not have PINs. Withholding on such individuals on i-Tax will be impossible. In this regard exemptions should be made for the requirement of PIN numbers in accounting for this tax.

The departmental committee on Finance and National Planning has proposed the change in definition of winnings to take into account losses made by the punters. Further, they have proposed to reduce the WHT rate from 20 to 10 per cent in addition to removing the requirement for punters to have PIN numbers. We hope that this time round KRA has addressed the bottlenecks experienced previously in implementing this tax.

Secondly, the Bill proposes to move a number of items that are currently listed as zero rated to the exemption schedule. The major reason for this is that the government wants to restrict zero rating to exports.

KRA’s argument is that VAT is a consumption tax and hence it’s borne by the final consumer of the goods. In this regard, since exports are consumed outside the country, the VAT cannot be charged on them and hence they are zero rated and any VAT on them is refunded. This move seeks to reduce the VAT refund burden that has dogged the taxman for a very long time.

READ: Millers warn of high maize flour prices on food tax overhaul

To understand the impact of this move, it is important to understand how the zero rating and exemption regimes works. When a good or service is exempted, the supplier of such a good or service does not charge VAT on the good or service but cannot claim the VAT that he is charged on his supplies. Consequently the supplier will pass that VAT to the final consumer. On the other hand, when a good is zero rated, the supplier charges VAT at zero per cent. Further the supplier is able to claim the VAT that he is charged on his purchases hence the net effect is almost zero hence this reduces the price of the good or service.

The Bill proposes to move maize and wheat flour, milk, LPG gas and medicaments from the zero rated status to the exempt status. These products had just been zero rated in last year’s Budget in a bid to ease the cost of living.

The exemption of these products will increase their cost since suppliers in these industries will not claim for a refund on the VAT suffered on their purchases. They will pass this VAT as a cost to the final consumer. This will negate the very reason why they were zero rated in the first place.

The greatest opposition has come from the pharmaceutical industry. They contend that medicines form over 40 per cent of patients’ hospital bills. Exempting the medicaments and the inputs used in their manufacture will push the price of medicines up and consequently the cost of healthcare. This will in effect torpedo the government’s effort to provide universal affordable healthcare which is one of the pillars of the Big Four agenda.

Nathan Maiyo, senior tax consultant, Andersen Tax, Kenya