In the recently read budget, government well and truly angered Kenyans when it suggested some measures to entrench the feeling that it works against the common man, and to the benefit of the wealthy elites.
The tax sector is one of the areas that witnessed many amendments, and left many Kenyans, particularly those in the low earning brackets, feeling that the government was pushing them too hard in finding the money to fund the Big Four Agenda. This is even after the taxpayers have witnessed billions of their money being squandered as a result of corruption, an example being the back-to-back instances of grand corruption at the National Youth Service (NYS).
As a result of the budget, the prices of various commodities, have shot up and will continue to do so as government seeks to collect more money to finance their development projects. An example is mobile money where transaction charges rose from 10 to 12%. What’s more, basic commodities like maize meal, liquefied petroleum gas, milk and some medications have not been spared.
The Treasury CS proposed various amendments to items that are subject to VAT, tax exemption and zero rating. Accordingly, all goods and services, except those exempted and zero rated, are subject to the standard rate of 16%. For some perspective, items that are zero-rated are those that, even though deemed taxable, their tax rate is usually zero; on the other hand, those that are subject to tax exemption are items which are not deemed taxable.
In Henry Rotich’s latest budget, the government shuffled various items to different VAT tax rates prompting a price change in the market. For instance, he decided a change of the following items from being tax exempt to be subject to the VAT standard rate: garment and leather footwear which is manufactured in an EPZ at the point of importation, medications containing alkaloids, transportation of cargo outside Kenya and maize seed.
In addition, petroleum products that have been exempt for the last two years will now also be taxable as well, unless an extension is put in place under the Finance Act. All products connected to the affected segments will see an increase in their costs of production thus leading to increases in prices at the retail end.
Additionally, the new budget clustered some goods and services as zero rated, to reduce or stabilise their price to make them more affordable. Until now, they have included goods supplied to marine fisheries and fish processors. This list was amended to include medicaments containing ephedrine or its salts, pseudoephedrine (INN) or its salts and/or ephedrine or its salts.
Apart from moving around items into the zero rating class and the standard rate (16%) class, the government also transferred some items to the class of goods and services that are tax exempt. To reduce the high costs that many businesses have to incur in their daily operations, the government added the following items to the list: Equipment and machinery for the construction of grain storage facilities – to ensure food security; raw materials used for the manufacture of animal feeds – to make animal feeds affordable to farmers and attract investors; parts imported or purchased locally for the assembly of computers – to help the ICT sector to grow; specialized equipment for the generation of solar and wind energy – to promote green energy; and seeds – which include wheat and barley seeds.
Others include postal services, goods and services for direct and exclusive use in projects under special operating framework with the Government, machinery and plant used in the manufacturing of goods, hospitals expanded to include equipment and outpatient facilities that were not covered, supply of beverages to Kenya Defence Forces Canteen Organization (DEFCO), cereal straws and husks, lucerne (alfalfa) meal and pellets, as well as beet-pulp, bagasse and other waste from the manufacture of sugar.
Additionally, the government also proposed to move some items from the zero-rated list to the tax-exempt list. These include maize flour, bottled water, bread, liquid petroleum gas, milk and processed fish. The aim is to reduce the VAT refund claims for which the Kenya Revenue Authority (KRA) has to compensate those who deal with goods and services that are zero rated.
According to Michael Mburugu, a tax partner at PKF, even though VAT exemptions are easier to administer, they serve to increase the cost of production, which in turn leads to a higher cost of basic commodities. “When you make goods exempt, the manufacturers cannot claim their input VAT which will see them put it in the pricing mechanism. That means an exempt item is going to be more expensive than a zero-rated item,’’ explains Mr Mburugu.
It is commendable that government has made attempts to reduce business expenses even as it works to increase its revenue. However, it must change tack and avoid overreliance on tax exemption.
In other words, Treasury must rethink its policies so that both parties come out on top. If not, then ‘it’s clear there is no such thing as a good tax.’