KRA opposes removal of tax on food and farm inputs

The continued exclusion of some goods from consumption tax ran into fresh hurdles on Tuesday after the taxman rejected a recent Cabinet decision to reverse the planned phase-out of exemptions.

Kenya Revenue Authority (KRA) Commissioner General John Njiraini warned the government to tread carefully when formulating tax policies to ensure they have long-term benefits as opposed to meeting short-term demands.

Mr Njiraini told tax experts in Nairobi that obsession with the effects that the tax would have on the pricing of commodities in the short term posed the danger of leading the country down the wrong path.

The taxman argued that the Cabinet decision to retain exemption on certain goods was not only self-defeating but also amounted to transferring the tax burden to the wrong party.

“Zero-rating of goods is not only self-defeating but also transfers the burden of footing consumption bills from the rightful party (the consumer) to the wrong one (the public through the government),” he added, while cautioning against “populist remarks” by persons debating the Bill.

Mr Njiraini was speaking at a public forum organised by the Institute of Certified Public Accountants of Kenya (ICPAK) to debate the VAT Bill.

The taxman affirmed his support for a leaner tax exemption list, to reduce the burden of paying tax refunds as well as bring more Kenyans into the tax net.

He was reacting to Finance minister Njeru Githae’s announcement last week that the Cabinet had agreed to retain the exemptions on a select list of items including foodstuffs, seeds, and exercise books.

Mr Githae said he would be introducing amendments to the controversial Bill at the committee stage to exempt the items from the 16 per cent tax.

The minister said the Cabinet had reversed the decision to charge value added tax on selected consumer goods as it sort to jump-start debate on the Bill that stalled two weeks ago amid popular opposition.

Parliament’s had threatened to pass a vote of no confidence in the Finance minister and the government if staple foods were subjected to taxation.

READ: MPs fight bid to scrap tax waivers on farm inputs

“The Cabinet agreed that a select number of food items be zero rated and the MPs added seeds and exercise books which we have agreed on,” said Mr Githae.

The Treasury’s intention to phase out zero-rating of foods for VAT is meant to bring clarity to the tax system and clear the burden of paying refunds to the manufacturers that has over the years accumulated to more than Sh18 billion.

Parliamentarians insist that imposition of taxes on previously zero-rated products and the phasing out of VAT remissions on capital investment would hurt the poor and erode Kenya’s competitiveness for foreign direct investments.

Tuesday, Mr Githae said that apart from the four items on the special list “all other imported items that were previously zero-rated will attract VAT at the rate of 16 per cent.”

KRA wants VAT charged on all items and special consideration given only in specified cases targeted through new policies.

In the case of exercise books, the taxman suggested that the 16 per cent tax be charged and special consideration (through a government subsidy) be given to books destined for public schools.

“It is assumed that parents who take their children to private schools can afford to pay the high fees and are therefore capable of buying the books inclusive of the tax,” said Mr Njiraini insisting that a "similar intervention would help farmers acquire inputs they cannot afford.”

Tax experts and sector representatives from soon-to-be affected industries such as farming, tourism and manufacturing remained divided on the merits and demerits of the proposed tax measures.

READ: Lobby opposes plan to tax farm inputs, foodstuff

Nikhil Hira, a tax partner at consulting firm Deloitte, opposed the proposed law terming it populist.

Mr Hira argued that although it would move the country from the present scenario of “too many exemptions to one or almost none” it would result in higher commodity prices and hurt low-income earners.

His argument is that while the proposed tax exemptions as set out in the Bill only relate to unprocessed foods, many poor Kenyans living in peri-urban areas consume processed food and would be adversely affected by it.

“The government’s backtracking in terms of the exempt list may be populist to some extent but it is also sensible in as far as the common citizen’s purchasing power is concerned,” he said.

VAT accounts for about 27 per cent of the annual revenue but tax experts estimate that without the exemptions, it would account for between 40 and 45 per cent. 

The immediate impact of removing the exemptions, according to cabinet papers, would be to raise an extra Sh5 billion in government revenue.

Patrick Mtange, the ICPAK chairman, insisted that care must be to limit the exempt items list to an extent that does not overburden the citizens.

Imported goods that have been left out of the new exemption and which if the Bill sails through parliament would attract VAT include medicines, sanitary pads, baby formula, napkins and napkin liner, feeding bottles.

VAT would also be charged on transactions involving the sale of commercial buildings, purchase of condoms as well as athletes earnings.

Passing of the Bill would herald higher inflation pressure arising from the rise in the prices of goods that would attract tax.

Under the old exemption rule maize, rice, wheat, sugar, milk, edible vegetable fats and oil, fertilisers and pesticides were among VAT-exempt goods.

The agricultural sector stands among those that would be heavily hit as locally assembled water pumps, pesticides, fishing nets, animal feeds and farm machinery come under full taxation.

Stakeholders in the sector have warned that charging VAT on agricultural inputs would lead to increased food prices even if food items are exempted.

The Eastern Africa Grain Council (EAGC) Chairman Judah arap Bett said exempting food from VAT would be meaningless if farm inputs were taxed because farmers would transfer any additional costs to the consumer.