Poor Kenyans to pay more for basic items as State seeks to raise Sh64b

Treasury Cabinet Secretary Henry Rotich sets out elaborate, but punitive tax measures to hammer low and middle income earners hard, but ironically grants huge breaks to the the rich.

The Government is planning to raid the pockets of citizens, who are already among the world’s most highly taxed people, to raise more money.

According to a National Treasury brief sent to the country’s largest lender, the International Monetary Fund (IMF), Kenya is seeking to raise Sh64 billion through taxation of basic commodities.

The targeted products in the latest move are low-end cigarette brands, beer, fruit juices, soda, bottled drinking water, motorcycles and imported second-hand cars, whose prices are all set to rise.

In his brief to IMF boss Christine Lagarde, Treasury Cabinet Secretary Henry Rotich sets out elaborate, but punitive tax measures to hammer low and middle income earners hard, but ironically grants huge breaks to the rich. Even fuel is listed among the products whose price is to be increased but it is not clear by how much.

"We have taken concrete steps to collect additional revenue through a wide range of revenue yielding corrective measures... that would yield about Sh63.64 billion or one per cent of the GDP," Rotich's brief to IMF head sent on August 31 but only made public last week shows.

Under the latest taxation measures, prices of low-end cigarettes could double, while those of cheap second-hand car imports will rise by more than Sh150,000 – after the implementation of a new schedule that slaps a uniform rate of Sh200,000 on all vehicle imports irrespective of size.

Top-end cars such as Toyota VX, which are popular with legislators and other top officials, would ironically enjoy huge reprieve from that taxation schedule.

Prices for motorcycles, whose use in the public transport sector across the country have swelled in the last three years, would rise by more than a tenth after the imposition of a flat Sh10,000 excise duty.

Fruit juices and soda could cost up to 40 per cent more in the taxation plans by Sh10 per litre.

The higher costs could be compounded by costlier plastic and polythene packaging material, which have also been affected by the new schedule.

The higher prices are already 'late' in implementation, as they should have come into effect on July 1, but were held back by the lengthy Parliamentary procedures in passing legislation.

Rotich's banks on Excise Duty Bill 2015 was passed by Parliament last week to net in the extra cash. The bill contained the tax changes through which the Government hopes to raise the Sh28.44 billion.

"We have faced several challenges implementing the 2014/15 budget. Revenue collection has been weaker than projected, reflecting mainly lower-than-expected income tax and VAT collection, and challenges in the full implementation of the capital gains tax," admits Rotich.

He says the State's tight financial position has forced the Government to also stop all new commitments by ministries and other agencies as of June 8, 2015.

"These measures allowed us to meet the indicative target on the primary fiscal deficit excluding Standard Gauge Railway (SGR)-related spending for end-June 2015."

Rotich's memo gives a broader understanding of the painful taxation law passed by the National Assembly last week. In the repealed Excise Duty legislation, MPs voted to push the prices of basic commodities including fruit juices and motorcycles through the roof in new taxation measures, as the State battles a biting revenue crisis.

Besides the Excise Duty Act, 2015 adopted by Parliament and which would net Sh28.44 billion in revenue, Treasury hopes to raise Sh5 billion from the Income Tax Act, which replaced Capital Gains Tax with a withholding tax on the transaction all shares traded on the Nairobi Securities Exchange.

He also hopes to collect Sh8.1 billion from VAT revenue after the recently launched iTax identified a number of companies that were non-compliant.

The Treasury also expects Sh3 billion from the expected improvement in compliance on customs revenues following the recent adoption of the Electronic Single Window declaration module and Sh4.1 billion from real estate, after it simplified tax charges by introducing 12 per cent tax on gross rental income.

Other tax measures include Sh10 billion from expected improvement in compliance from Pay-As-You-Earn (PAYE); and Sh5 billion from a newly introduced levy on identity verification queries to the Integrated Population Registration System (IPRS).

The IMF was also informed that the State has frozen any new hiring and prospective salary raises in a new drive to mend its battered cash position.

IMF is Kenya's largest lender and often imposes tough conditions before providing any bailouts as was the case when Central Bank sought the Fund's help to correct the volatility of the shilling. It received Sh80 billion to boost its forex reserve.

In another commitment that could renew the run-ins with governors, the Treasury is keen on introducing a single account from where all revenues collected by all departments, Kenya Revenue Authority and the counties would deposit collections before any spending takes place.

Rotich's letter to Ms Lagarde was clear about the plans to widen the tax base and hopefully raise more revenue.

IMF sets stringent conditions for countries that it lends to, relating to their respective policies on revenue collections and spending.

Rotich's memo sought to reassure the IMF that the State was on top of things by growing the revenue base, through measures that largely target the poorer in society.

But the events of October alone, where the State would borrow cash at interest rates above 22 per cent, only help paint the picture of a broke government desperate to get cash regardless of the cost.

Jakoyo Midiwo, the Opposition chief whip in the National Assembly, told The Standard on Friday that the tax measures were 'ridiculous at best'.

He had earlier in the week led mostly Opposition MPs on a walkout when the Bill was passed in Parliament.

Before the enactment of the revised Excise duty, importers would pay Sh51,724 as excise duty on a seven-year old Toyota Vitz. Similarly, a Toyota Land Cruiser manufactured in 2012 and powered by a four-litre mega engine – the popular models in Parliament Buildings, would attract excise duty of Sh642,085.

Savings on excise duty alone for buyers of such fuel guzzlers are more than Sh440,000. With the new duty terms, the two buyers will pay a uniform duty of Sh200,000.

The revised excise duty law alone is projected to help realise an additional Sh28.44 billion from cigarettes, alcoholic beverages, motor vehicles and motor cycles, and fuels, Mr Rotich told Ms Lagarde.

Cigarettes will from now be taxed at a uniform rate, rather than by the quality, at Sh2.5 per stick. Previously, cigarettes were taxed on a two-tier approach. The high-end cigarette attracted Sh1.20 duty or 35 per cent of retail price – meaning cheaper brands attracted lower taxes.

Excise duty on beer have risen by as much as double to Sh100 per litre, up from between Sh50 and Sh70.

In another meeting with MPs on Thursday, Rotich said that the delay in the passage and enactment of the repealed laws on excise duty could have huge implications on the Government's revenue base in the current financial year, as the anticipated revenues had already been factored into the national budget for the financial year that started on July 1.

KRA boss John Njiraini told the same meeting that delays in the enactment of the excise duty law had actually depressed revenue collection.