Consumer goods fall on low VAT

The cost of basic goods like detergents, cooking oil, electricity, airtime and services like pay TV subscriptions have dropped marginally after the Treasury’s measure to reduce the Value-Added Tax rate from 16 to 14 percent kicked in Wednesday.

The reduction in VAT is part of the raft of measures announced by President Uhuru Kenyatta last month to ease pain on households facing lower incomes arising from the slowdown in the economy caused by the Coronavirus pandemic.

Companies like Safaricom #ticker:SCOM and Multi-Choice Wednesday moved to adjust their product prices in line with the VAT reduction.

This is the first time in seven years that Kenya will be reducing VAT after including more commodities under this tax category in 2013. Among the goods that will benefit from the lower VAT are newspapers, books, phones, electronics, computer hardware and software. Raw foods are exempted from the tax.

Despite the relief for consumers and households, the impact of social distancing and restrictions on businesses like schools, bars and restaurants look set to impact on workers in those industries, putting them at risk of pay cuts, job freezes or being sent on unpaid leave as the affected firms come to term with reduced cash flow and earnings.

Besides VAT, Kenya has also offered income tax reliefs and a reduction in the maximum rate of Pay-As-You-Earn (PAYE) of 25 percent, down from 30 percent; companies will also enjoy lower corporate tax, which will be reduced by five percentage points while small businesses will benefit from reduced sales tax for small traders to one percent from three percent. The changes have to be approved by Parliament before they can kick in. MPs will sit next week to deliberate on the Bill that will bring the incentives into force. Parliament must approve the tax cuts save for the VAT, which took effect yesterday (April 1).

The tax reliefs are geared at lowering the cost of basic goods while providing workers with additional income for spending to boost consumption, which will translate to higher sales for retailers, traders and other players in the supply chain.

Treasury Secretary Ukur Yatani took advantage of a clause in the tax laws that allows him to vary the VAT by margins not exceeding 25 percent to implement the lower consumption tax.

Soon after the incentive kicked in, Safaricom announced it would give its customers additional credit and Internet bundles in line with the two percentage cut in VAT. For example, a customer who buys Sh100 airtime will get an additional Sh2 of talk time, while those who buy data bundles worth Sh2,900 for home use will get Sh58 additional Internet.

Pay TV firm, MultiChoice, also cut the cost of watching its channels by between Sh19 and Sh130 depending on the bouquet. Effectively, the cost of a monthly subscription to DStv Premium has fallen to Sh7,370 from Sh7,500, DStv Compact by Sh45 to Sh2,455, while subscribers of GoTv Max will now pay Sh19 less to Sh980.

Electricity bills have also fallen slightly after the two percentage reduction in VAT kicked in, offering relief to families now spending more time in their homes. Those who on average consumer power worth Sh1,000 monthly, will save about Sh18 in VAT cut benefits.

Pwani Oil has also lowered the recommended retail price for its product, with the cost of 250-gramme Sawa soap falling by Sh1 to Sh49, while a three-litre Fresh Fry cooking oil will now retail for Sh588, a drop of Sh12.

“Most essential products are either exempted or zero-rated, but what this (the VAT levy cut) is doing is that it’s giving consumers cheaper prices on goods that are subject to VAT which is a good thing because you want people to spend as well,” said Nikhil Hira, a tax expert and director at law firm Bowmans.

Basic commodities such as food, medicines and farm input are VAT exempt.

VAT is key to the government strategy to shrink its fiscal deficit while funding essential programmes. President Kenyatta in 2018 cut VAT on fuel products to eight from 16 percent after facing a fuel dealers strike, angry commuters and a lawsuit after transport and fuel prices jumped.