Month: November 2013

VAT in Kenya: Punitive or are we a country of whiners?

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taxman

Introduction

Today the post is light and seeks to provoke thought on an issue that still causes controversy : the VAT Act 2013.

Tax has always been a touchy issue for Kenyans but recently became an explosive one when Kenya’s National Assembly passed the VAT Act 2013 which then came into effect on 2nd September 2013. Most Kenyans have always felt disgruntled about tax and there are at least two big reasons for this. The first is due to the feeling that taxes often end up lining the pockets of government officials and are never used properly. So what’s the point of introducing a new Bill that will tax Kenyans even more? Shouldn’t the focus be on stifling corruption? Secondly, the introduction of this specific 16% Value Added Tax (VAT) was seen as particularly onerous as it targets what many view as ‘basic goods and services’ such as processed milk, cooking gas, school books, electricity, fertiliser and other commodities that were previously tax exempt. Indeed newspaper columnist Mutuma Mathiu observed that the VAT is basically over-taxing the poor and is, ‘the kind of ideology-deprived decision that an inexperienced government would make’.[1] Ouch.

But one has to ask: Why did the government table the Bill in the first place? Well, it depends who you listen to. The most popular story is that devolution has led to a bloated and therefore expensive government and slapping VAT on basic goods is the easiest (and laziest?) means through which money can be raised to foot the bill. The tax will also help the government meet its ambitious campaign promises. The second theory argues that large-scale tax evasion is costing the government up to KES 20 Billion annually.[2] This, and Kenya’s narrow tax base (largely because those in the informal sector are not reached by the taxman), is costly for the government. Putting a tax on basics such as milk ensures that EVERYONE pays tax in one way or the other…even if that means some Kenyans will be double taxed. The final theory is that, ‘The IMF was not happy with the long list of tax-exempted goods; the Kenyan government had to make good on their promise to the IMF to ‘improve’ the VAT law.’[3]  The Consumer Federation of Kenya is of the opinion that this alone is problematic as, ‘It cannot be ‘good’ merely because IMF says that it is a conditionality for grants and loans.’[4]

You decide which of these theories you believe but at the end of the day, the VAT Bill was passed.

Voices against the VAT

As expected, public protests preceded and followed the Bill’s enactment and numerous voices scathingly rang out against the Bill. The main anti-VAT arguments are as follows:

1. The Bill will likely have the biggest impact on the poor people due to the increase of 16% on purchases.[5]  The Bill is anti-poor as the additional tax burden on all essential items will take a greater share of the income of poor households than that of the non-poor households.[6] Further, why does the Bill tax essentials, yet luxury items such as helicopters don’t attract the same?

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2. The Bill will likely cause an immediate reduction in the purchasing power per family, and the slowdown of economic activity in the medium term.[7]

3. The Act eliminates the previously concessionary VAT rate on electricity, diesel oil and fuel oil which was intended to cushion local manufacturers against high energy costs.  The change is likely to increase the cost of locally manufactured goods especially given the dependence on thermal sources of energy to generate electricity.[8] Further, VAT on jet fuel, kerosene and aviation spirit will likely increase the cost of local and international air travel and render the local airlines uncompetitive.[9

4. The Bill raises the cost of inputs and therefore the price of locally produced goods making imported goods more affordable thereby displacing local producers.[10] Further, new and prospective entrepreneurs may find it difficult to grow their enterprise especially when inputs are heavily taxed yet they operate in an environment in which fiscal policies enable foreign firms to compete effectively.[11]

5. The Bill is punitive to key sectors that support economic growth such as tourism.  Tourism players argue that the sector is already experiencing a slow down because they have had to push up the cost of their services making Kenya a more expensive destination. This in turn will have negative implications for the overall economy to which tourism contributes significantly.

6. The VAT hike may drive inflation up in the short term. The Central Bank expressed its concern over potential inflationary pressures emanating from the implementation of the Value Added Tax law.[12] A research institution, further argued that, ‘Holding everything constant, this single law could see inflation increase by close to 200 bps as a primary effect’.[13]

7. Given the role of the mobile phone in Kenyan life as a source of communication, money transfer and even a savings device, taxing mobile phones and other ICT equipment takes phones, which are often a lifeline for some rural users, further away from their reach. Further, Kenya’s ICT sector contributed 5% to the growth of GDP in 2011-2012. High pricing will reduce digital penetration and less penetration will reduce contribution to the GDP growth.[14]

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8. The Bill seems to give sweeping powers to the KRA, ‘Sec. 27 allows KRA to unconventionally “direct the Chief Land Registrar” that land and buildings of tax defaulters will be used as security. It again lacks clarity on the manner and circumstances which precede such “directions”.’[15]

9. Finally, apart from goods consigned to or purchased by the Kenya Red Cross and St. John Ambulances, other charitable institutions will pay VAT despite the fact that they have an altruistic mission and assist those the government doesn’t.[16]

See an interesting article here by the Consumer Federation of Kenya on other reasons it opposed the Bill.

Voices in favour of the VAT

 However, there are also those who didn’t mind the Bill while others even championed it. Indeed one research group stated, ‘In our view, the new VAT code has some solid positive implications that have been lost in rhetoric’.[17]  The Institute of Certified Public Accountants also backed the Bill. This is what pro-VAT Bill voices had to say:

1. One of the key advantages of the Bill is that it simplifies the country’s tax code, making compliance easier. In the past the Kenya tax code was, ‘wrought with ambiguities, vagueness and sometimes conflicting interpretation. So the simple two way provision for either Zero or 16% is welcome’. [18] Indeed the KRA argued the Bill was not only formulated to help the government raise revenues but also to ease tax compliance in Kenya and thus improve the country’s investment climate.[19]

2. The changes will remove ambiguities which the KRA has exploited to collect tax from some taxpayers.[20] In the same way that previous loopholes facilitated tax evasion, they also facilitated exploitation.

3. Commodities are not necessarily cheap just because they are zero rated since there is no guarantee that the business person will pass this benefit on to the consumer.[21] So taxing is not really the problem here, perhaps the habit of eating from every potential corner by some business people is the real issue. (Bear in mind that when the Bill came into effect, unscrupulous business people raised the price of goods beyond the 16% margin or raised the price of goods that were still tax exempt.)

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4. KRA officials are now responsible for their actions or lack thereof. This Act penalizes dubious and unethical behaviour by KRA staff to the tune of KShs 1,500,000 or 3 years imprisonment. Perhaps the arbitrary use of power by KRA staff can now end.

5. Zero-rating of goods transfers the burden of recovering the VAT input cost from the consumer to the government leading to VAT refunds. ‘In effect, government subsidises consumption of zero-rated items…as a result of the exemptions, the government has been forced to scale down on development expenditures to meet the VAT input costs for manufacturers in terms of VAT refunds.’[22] The Bill seeks to rectify this. (Read this for Deloitte’s rebuttal of this argument.)

6. The introduction of a VAT of 16% is lower than regional regimes; Uganda and Tanzania VAT both stand at 18%. Further, the Bill is part of a move by East African Community countries to prioritise the harmonisation of taxation regimes as one way of promoting investment into the region.[23] Perhaps Kenyans should be willing to make sacrifices if these sacrifices attract investment and fuel job creation in the country.

east-african-community

7. The New Act exempts taxable supplies (excluding motor vehicles) imported or purchased for direct and exclusive use in geothermal, oil or mining prospecting or exploration.[24] Deloitte argues that, ‘this is an extremely welcome move as it takes cognizance of the fact that costs for oil prospectors are huge and not being income generating should not be subject to additional tax’. [25] This provision makes Kenya a more attractive investment destination for this sector.

8. VAT will increase government revenue which will lower their need to borrow locally. This is good news for individuals with loans and the real estate sector as interest rates will not be pressured upward due to increased government demand for local credit.

9. The VAT is one of the tax measures that the government is using in order to support the poor and marginalised. The government, ‘has committed to transferring Ksh8 billion ($94.11 million) to guardians of orphans and vulnerable children…. The country will also spend Ksh3.2 billion ($376 million) to double the number of elderly members of the society receiving a monthly cash stipend from the government from 59,000 to 118,000’.[26]

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At the end of the day, perhaps due to public outcry, the National Assembly passed an amended Bill that granted tax exemptions to, ‘bread, rice, milk, wheat, milk formula for infants, maize flour, First Aid kits, vaccines, bandages and sanitary towels.[27]

I’m sure many of you had made up your minds on this already; this post was just a challenge to consider what the other side has to say. But as someone said, and I agree, ‘If the Kenya government can assure us that the collection of additional VAT will result in better roads, better social services, improvement in education and health services and helping the poor have access to basic necessities, then Kenyans might be a bit accommodating.’[28]


[1] COFEK (2013), VAT Bill 2013: Cofek presentation to Parliament’s Committee on Finance, Trade and Planning, http://www.cofek.co.ke/index.php/14-news/132-vat-bill-2013-cofek-presentation-to-parliament-s-committee-on-finance-trade-and-planning

[2] Varyanne Sika (2013), ‘ Will Slapping 16% VAT Cripple Growth of the Kenyan ICT Industry?’, http://www.ihub.co.ke/blog/2013/08/will-slapping-16-vat-cripple-growth-of-the-kenyan-ict-industry/#sthash.OJzJlh9X.dpuf

[3] Varyanne Sika (2013), ‘ Will Slapping 16% VAT Cripple Growth of the Kenyan ICT Industry?’, http://www.ihub.co.ke/blog/2013/08/will-slapping-16-vat-cripple-growth-of-the-kenyan-ict-industry/#sthash.OJzJlh9X.dpuf

[4] COFEK (2013), VAT Bill 2013: Cofek presentation to Parliament’s Committee on Finance, Trade and Planning, http://www.cofek.co.ke/index.php/14-news/132-vat-bill-2013-cofek-presentation-to-parliament-s-committee-on-finance-trade-and-planning

[6] COFEK (2013), VAT Bill 2013: Cofek presentation to Parliament’s Committee on Finance, Trade and Planning, http://www.cofek.co.ke/index.php/14-news/132-vat-bill-2013-cofek-presentation-to-parliament-s-committee-on-finance-trade-and-planning

[7] Nairobi Business Monthly (2013), ‘Jury still out on VAT Bill’, http://nairobibusinessmonthly.com/jury-still-vat-bill/

[9] COFEK (2013), VAT Bill 2013: Cofek presentation to Parliament’s Committee on Finance, Trade and Planning, http://www.cofek.co.ke/index.php/14-news/132-vat-bill-2013-cofek-presentation-to-parliament-s-committee-on-finance-trade-and-planning

[12] James Anyanzwa (2013), ‘Central Bank of Kenya warns on negative effects of new VAT law’, http://www.standardmedia.co.ke/business/article/2000094799/cbk-warns-on-negative-effects-of-new-vat-law

[13] Nairobi Business Monthly (2013), ‘Jury still out on VAT Bill’, http://nairobibusinessmonthly.com/jury-still-vat-bill/

[14] Varyanne Sika (2013), ‘ Will Slapping 16% VAT Cripple Growth of the Kenyan ICT Industry?’, http://www.ihub.co.ke/blog/2013/08/will-slapping-16-vat-cripple-growth-of-the-kenyan-ict-industry/#sthash.OJzJlh9X.dpuf

[15] COFEK (2013), VAT Bill 2013: Cofek presentation to Parliament’s Committee on Finance, Trade and Planning, http://www.cofek.co.ke/index.php/14-news/132-vat-bill-2013-cofek-presentation-to-parliament-s-committee-on-finance-trade-and-planning

[16] COFEK (2013), VAT Bill 2013: Cofek presentation to Parliament’s Committee on Finance, Trade and Planning, http://www.cofek.co.ke/index.php/14-news/132-vat-bill-2013-cofek-presentation-to-parliament-s-committee-on-finance-trade-and-planning

[17] Nairobi Business Monthly (2013), ‘Jury still out on VAT Bill’, http://nairobibusinessmonthly.com/jury-still-vat-bill/

[18] Nairobi Business Monthly (2013), ‘Jury still out on VAT Bill’, http://nairobibusinessmonthly.com/jury-still-vat-bill/

[19] Peter Kiragu (2013), ‘The Hidden Benefits Of The VAT Bill 2013’, http://www.the-star.co.ke/news/article-129020/hidden-benefits-vat-bill-2013

[21] KAM (2013) ‘What repercussions does the VAT ACT 2013 have for Kenyan Manufacturers? ‘,http://www.kam.co.ke/index.php/latest-news/347-what-repercussions-does-the-vat-act-2013-have-for-kenyan-manufacturers

[22] Peter Kiragu (2013), ‘The Hidden Benefits Of The VAT Bill 2013’, http://www.the-star.co.ke/news/article-129020/hidden-benefits-vat-bill-2013

[23] Ruth Ndichu (2013), ‘Proposed VAT laws to benefit both governments, citizens across the EAC’, The East African, http://mobile.theeastafrican.co.ke/Opinion/Proposed-VAT-laws-to-benefit-both-EAC-governments-and-citizens/-/433846/1928222/-/format/xhtml/item/1/-/i420p4/-/index.html

[24] Taxwise (2013), ‘Kenya New VAT Act 2013’, http://taxwise-consulting.com/news/114-kenya-new-vat-act-2013

[26] Peterson Thiong’o, (2013), ‘Kenya in tax measures to build infrastructure, cushion old and poor’, http://www.theeastafrican.co.ke/news/Kenya-in-tax-measures-to-build-infrastructure/-/2558/1883932/-/7foujf/-/index.html

[27] Alphonce Shiundu (2013), ‘Relief for Kenyans as amended VAT Bill is passed’, http://www.standardmedia.co.ke/business/article/2000090325/relief-for-kenyans-as-amended-vat-bill-is-passed

[28] The Voice of Africa (2013), ‘Kenyan VAT Bill and its implications’, http://www.africaontheblog.com/kenyan-vat-bill-and-its-implications/