IMF pushes for higher prices of maize flour, cooking gas

Shoppers at a supermarket in Nairobi
Shoppers at a supermarket in Nairobi. FILE PHOTO | NMG 

The National Treasury is under pressure from the International Monetary Fund (IMF) to raise the prices of basic goods by at least 16 percent in an effort to cut budget deficit and tame public borrowing.

The multilateral financier says the 16 percent value added tax that the government has scrapped on ‘sensitive’ goods such as bread, cooking gas, maize and wheat flour has significantly contributed to collection shortfalls.

The IMF in a review of Treasury and Kenya Revenue Authority (KRA) books last year, said sensitive goods and services have doubled since 2013 and are now costing the taxman more than Sh478 billion, more than its collection shortfall of Sh300 billion.

In 2013, there were 40 exempt goods and 18 exempt services but by last year, 104 goods and 31 services were tax-exempt, the IMF noted.

Eight items were zero-rated in 2013 and by 2019 this list had grown to 17 items.


“Publish an annual report on the impact of tax expenditures and their budgetary implications, highlighting the costs of new exemptions, waivers, reliefs, and allowances,” the IMF said.

The World Bank undertook a study in 2017 which provided estimates of some tax loopholes that revealed Kenya loses 1.8 percent of GDP on corporate income tax and 3.1 percent on VAT.

“The KRA cites tax expenditures as a major impediment to its ability to meet revenue targets, with tax expenditures estimated at Sh478 billion in 2017 against a shortfall in budgeted collections of about Sh300 billion,” the IMF said.

“The number of exempted and zero-rated items has more than doubled since 2013,” the report read.

When the current government came to power in 2013, they changed the VAT law from varying rates for each goods to a flat rate of 16 percent. This, the government argued at the time, would make administering the tax law easier and was better than its predecessor, which created many exemptions and loopholes for cheating.

The VAT Act 2013 reduced the number of exempt goods and services from 3,000 to less than 50.

However, lobbying by the private sector in subsequent budgets and State interventions on cost of living have watered down the law.

The government removed VAT on LPG gas to discourage use of charcoal, construction of specialised hospitals with accommodation and the tax on local pesticides to reduce cost of production for farmers.

While animal feeds are exempt from VAT, the government added raw materials used in the manufacture of animal feeds to the list to make them affordable to farmers.

In tourism, the State lifted VAT on fees charged at national parks and commissions eared by operators as well as locally assembled tourist vehicles that boosted travel.

Clothing made at Export Processing Zones were also exempted to compete favourably with imports.

The government resisted an increase in VAT for fuel since 2016, postponing it each year until 2018.

To encourage investments, VAT was lifted on fishing gear, real estate trust, special economic zones and equipment in specialised hospitals.