The cost of essential goods and services is set to rise in a proposed review of taxation laws as the Ruto administration appears to buckle under decade-long pressure from the International Monetary Fund to drop blanket reliefs on consumption.
Treasury Secretary Njuguna Ndung’u has disclosed a plan to stop the zero-rating of value-added tax (VAT) on the supply of tens of goods such as maize flour, cooking gas, ordinary bread, medicaments, agricultural pest control products, and animal feeds.
The proposed review will also pressure the cost of essential supplies such as locally assembled mobile phones, motorcycles, electric bicycles, solar batteries and electric buses which are currently VAT zero-rated.
The draft Medium Term Revenue Strategy, whose outcome will come into force from July 2024, suggests that zero-rating for VAT purposes will be restricted to the export of goods and services, while exemption will apply to goods in raw state.
The implementation of the far-reaching changes in consumption tax laws will mark the full implementation of the IMF-backed reforms that overhauled the VAT Act in 2023.
The IMF has for about a decade now been pushing reforms aimed at taxing all goods, with the vulnerable households to be cushioned through social protection programmes.
The doubling of VAT on fuel to 16 percent in July, after multiple failed attempts in the past, is part of those reforms.
“First Schedule (exemption) and Second Schedule (zero-rating) to the VAT Act will be reviewed to rationalize the exempt and zero-rated supplies and align the VAT system to the destination principle as well as other international best practices,” Prof Ndung’u wrote in the draft revenue strategy.
“The review shall limit zero rating to exports and remove all VAT exemptions except for unprocessed goods.”
The Ruto administration has pledged to “develop an appropriate strategy to address the tax burden on essential goods and services.”
The Treasury argues that the policy on zero-rating and exemption in the VAT tax system has over the years eroded government revenue, with collections underperforming potential by nearly 40 percent.
The Treasury estimated last year that tax concessions on domestic VAT — paid by traders with annual sales of more than Sh5 million— dropped to Sh211.94 billion in 2021 from Sh234.38 billion in 2020.
Domestic VAT, however, accounted for 82.29 percent of the Sh259.51 billion revenue forgone by the Kenya Revenue Authority in 2021.