How newly passed Finance Act will affect the money in your pocket

The Government already got a lot of flack from critics after the June Budget. There were those who felt Treasury Cabinet Secretary Henry Rotich had singled out motorists, women and poor households as the biggest financiers of his spending plan, after he targeted products like cosmetics, kerosene, petrol and diesel in an excise tax plan.PHOTO: COURTESY

The Jubilee government finds itself in a difficult financial position in an election year.

It has to figure out how to fund a huge Budget without hurting the majority poor, who have less than 10 months to pass their verdict on the President Uhuru Kenyatta’s government at the August 2017 polls.

The Government already got a lot of flack from critics after the June Budget. There were those who felt Treasury Cabinet Secretary Henry Rotich had singled out motorists, women and poor households as the biggest financiers of his spending plan, after he targeted products like cosmetics, kerosene, petrol and diesel in an excise tax plan.

A few weeks ago, seeking to spur economic activity and cushion the poor through tax incentives, President Kenyatta signed the Finance Act 2016 into law after it was passed by Parliament, with some amendments made to the Finance Bill 2016.

In an analysis of the new law, which was assented to on September 13, tax advisory and audit firm KPMG said it reflects the Government’s priorities.

The law introduces tax incentives for developers of low-income housing, and promotes the development of special economic zones as well as “increased revenue mobilisation through changes in the excise duty rates for various products, and expansion of the Pay As You Earn (PAYE) tax bands”.

Savings culture

The Finance Act also introduces betting, gaming, lottery and prize competition tax, targeting a multi-billion-shilling industry that has been blamed for cutting into the country’s savings culture.

But the law also attempts to phase out the second-hand clothes, or mitumba, industry, which millions rely on to clothe themselves, to revive the textile sector that employs thousands and has plenty of growth potential.

The Government has introduced duty of $0.4 (Sh40.8) per kilogramme of mitumba – up from $0.2 (Sh20.4) per kilogramme – and handed incentives to local clothing manufacturers, exempting garments and footwear made in export processing zones (EPZ) from VAT.

This is expected to allow Kenyans to access quality products at a cheaper cost.

“This move gives the EPZ manufacturers a competitive edge over other manufacturers operating outside the zones who do not benefit from incentives, such as duty free importation of raw materials,” PricewaterhouseCoopers (PwC) noted.

The levies in the sector are expected to translate to more expensive mitumba. Further, higher demand for products from EPZ industries locally and abroad might also drive prices higher in line with the laws of supply and demand.

The Finance Act has also sought to help the Central Bank of Kenya (CBK) manage inflation by extending the deferral of the introduction of VAT on petroleum oils.

It also props up industries that were under duress through, for instance, excise duty exemptions for locally assembled motor vehicles and motorcycles.

Mr Rotich had changed the excise duty for locally assembled vehicles from Sh150,000 to 20 per cent of their value, significantly increasing the vehicles’ costs, which reduced sales and sparked job losses.

“The Cabinet Secretary has listened to the local manufacturers and abolished excise duty on locally assembled vehicles,” KPMG said.

Affordable goods

Tax experts, however, warn that the benefits of the new finance law will not automatically trickle down to the ordinary Kenyan’s pocket – unless the Government is serious about making follow-ups.

Without this, the half measures and gaps in the Finance Act could allow the private sector to soak in the benefits and increase margins, without necessarily passing on any savings to consumers.

“The Government has introduced various VAT [value-added tax] exemptions, reflecting its intention to boost various sectors, such as agriculture, manufacturing, tourism and health services,” KPMG said.

These incentives include reduced corporate tax, as well as an expansion of VAT exemptions to include raw materials used for animal feed, wheat seeds, tourism and consumer products, manufacturers in industrial parks, and developers importing construction materials for industrial parks on land larger than 100 acres.

The hope is that the net effect will be more affordable goods and services in the market.

However, only time will tell if this will be realised, with tax experts warning the Government has little power to ensure the benefits are passed on to the poor.

“The trickle down of the tax incentives to the common mwananchi is largely dependent on the goodwill of the persons receiving the incentives. This is because we do not have price controls, and the Government has no mechanism to force businesses to pass the incentives to the public,” Clive Akora, an associate director for tax services at KPMG, said.

For example, the Government has halved the corporate tax on the construction of at least 400 residential units annually to 15 per cent.

This means developers will pay Sh15 in tax on every Sh100 they make in profit, down from Sh30.

“This amendment reduces the number of units required to enjoy the relief from a proposed 1,000 units in the Finance Bill 2016 to 400 units, allowing more developers to benefit,” KPMG noted in its analysis.

However, it is not clear if this will translate to cheaper rental prices, given the costs of land and finance remain high.

“One way that the Government can ensure the incentives are passed on is through consultations with stakeholders, where they agree that if the businesses do not pass on the benefits, the Government withdraws the incentive,” Mr Akora said.

He added that some of the incentives reduce the cost of goods and services, giving businesses the leeway to lower prices.

The Finance Act, for instance, has broadened the VAT exemption in relation to raw materials used in the manufacture of tissue papers, serviettes, polythene films and certain types of white paper.

Other provisions, such as the extension of VAT-exempt petroleum products for two years, zero-rating liquid petroleum gas and waiving VAT on clean cook stoves and park fees, are expected to benefit consumers immediately.

Low-income earners

The Government has also extended relief to low-income earners through an area it has direct control – levying income taxes.

The Treasury decided to define low-income earners as those who earn less than Sh12,000 a month, and offered them relief on incomes earned on rent, bonuses, allowances and retirement benefits.

For other salaried taxpayers, the Treasury has increased the personal relief from the current Sh13,944 per annum (Sh1,162 per month) to Sh15,360 per annum (Sh1,280 per month).

But following revision, any taxable income between Sh1 and Sh134,164 shall be levied a tax rate of 10 per cent, while the next Sh126,403 will attract a 15 per cent rate. Anything over Sh513,373 shall be taxed at a rate of 30 per cent.

“PAYE brackets have been expanded by 10 per cent and the relief also increased by 10 per cent,” Grant Thornton tax advisors said.

And in an effort to address rental prices, landlords who get less than Sh12,000 a month will be exempted from paying residential income taxes. However, few investors in the property sector are likely qualify for this as most hold several housing units.

“The limit is linked to the landlord rather than to the houses. Therefore, if a landlord has total rental income that is less than 12,000 he is exempted,” Akora said.

“If, on the other hand, the rental income exceeds Sh12,000 (from one or more units), he will be subjected to tax either at the rate of 10 per cent if the total rental income does not exceed Sh1,000,000 in a year, or between 10 per cent and 30 per cent if the income exceeds Sh1 million.”

The Government is also trying to encourage the development of new hospitals by exempting from VAT any supplies used in the construction of specialised facilities with accommodation.

To reduce the costs of drugs, the Treasury has zero-rated medicines under tariff code 3003.20 (medicaments containing other antibiotics) from VAT.

“Previously only medicaments containing penicillin or streptomycin and their derivatives were zero-rated. This amendment extends the zero-rating to medicaments containing other antibiotics,” KPMG said.

The Government has also allayed fears that water companies would impose excise duty on tap water, as under the previous regime, all waters were liable to excise duty

“The Act has excluded non-bottled water ... from the ambit of excise duty. In our view, this is aimed at eliminating the debate on the scope of water chargeable to excise duty,” PwC said.

Overall, the tax advisory firm said, the amendments introduced in the Finance Act are welcome, as they bring clarity in its application.

“The amendments have also cleaned up previous drafting errors. In addition, the Government has listened to the plight of taxpayers who were adversely affected by the law; notably local assemblers of motor vehicles and motorcycles, among others,” PwC said.

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