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Fiscal legitimacy problem in VAT proposal

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Treasury Cabinet Secretary Ukur Yatani. FILE PHOTO | NMG

Summary

  • In an unprecedented move, the Treasury Cabinet Secretary Ukur Yatani through the Finance Bill 2021 has asked Parliament to waive their prerogative over tax laws and give him unfettered powers to set the Value Added Tax rates.
  • Just hearing the proposal, it sounds unreal and can only be termed as the absurd of absurdity, but folks at the Treasury saw it to be a realistic one to run with, saying much about the stupor bubble they live in.
  • Ten years after the promulgation of the Constitution, folks at the Treasury are clueless about the basic principles of the Constitution and separation of powers.

In an unprecedented move, the Treasury Cabinet Secretary Ukur Yatani through the Finance Bill 2021 has asked Parliament to waive their prerogative over tax laws and give him unfettered powers to set the Value Added Tax rates.

Just hearing the proposal, it sounds unreal and can only be termed as the absurd of absurdity, but folks at the Treasury saw it to be a realistic one to run with, saying much about the stupor bubble they live in.

Ten years after the promulgation of the Constitution, folks at the Treasury are clueless about the basic principles of the Constitution and separation of powers.

Though this is a problem that cuts across the Executive and goes up to the apex going by the recent ruling by the High Court on the Constitution Amendment Bill.

The Rule of Law and constitutionalism is a foreign concept that the Executive has chosen to discard.

So, let us start with the question of why the CS would be desperate to have such unfettered powers?

The CS has defended his proposal, saying he seeks these powers so as to allow faster implementation of tax changes at a time the government is seeking more revenues to finance the Sh3.6 trillion budget next financial year.

Now this is a weak defence because the Treasury has submitted three supplementary budgets within this financial year before Parliament.

So, if he needs VAT tax changes to be passed by Parliament, he can still get it through Parliament as quickly as he has done the supplementary budgets.

In addition, the process he is castigating is intentionally designed to deliver scrutiny and give policy the legitimacy it deserves.

THE BACK DOOR

So, when the CS comes to ask for discretionary powers, he is admitting that the government has failed to win legitimacy of its proposed policy it wants to sneak from the back door.

How does he expect to be receptive to a tax policy that they or their elected representative did not pass? In fact, the short-cut he proposes to use will be the longer route.

Kenyans will challenge those unfettered powers in court if he is granted by Parliament together with the VAT rates that will follow.

It is obvious that the Treasury plans to increase VAT rates, currently at 16 percent while petroleum is at eight percent and some products zero-rated.

For some time now, the Treasury has had the intention to increase VAT rate from 16 percent to 18 percent but has felt the proposal doesn’t stand a chance in Parliament.

It can’t be a coincidence that the Treasury is asking for unfettered powers over VAT just when we have secured a structural adjustment programme loan from IMF.

VAT increases seem to be one of the conditionalities IMF gave Kenya and because of the backlash and how unpopular the proposal will be, the Treasury has chosen to use the back door to implement it.

It shouldn’t be forgotten that VAT was introduced in African countries by the IMF as part of their 1980-1990s SAP conditionalities.

Despite its regressive nature, the IMF has always found VAT a low hanging fruit for countries to increase their revenue collection because it is easy to collect and targets a broader tax base.

BORROWING SPREE

More fundamentally, the fact that the Treasury doesn’t want to involve Parliament in setting the VAT tax rates knowing the proposal is unconstitutional clearly demonstrates that it is alive to the fact that the government has lost its fiscal legitimacy.

The fact that since 2013 the government has been on a taxation and borrowing spree to finance its expansive budget with little to account for as well as high-level corruption, it has little remaining fiscal legitimacy to push for higher taxation, especially a regressive VAT with the poor carrying its highest burden.