MPs angry at planned changes to VAT rates

By ANTONY GITONGA

You should expect to begin paying more for essential commodities if tax measures being proposed by Government are implemented to the letter.

This is the cold hard truth at the heart of the draft Value Added Tax Bill expected to come before Parliament for deliberation next week.

Lawmakers who have seen the Bill are up in arms at the proposed changes to the VAT law. There are proposals to increase what you pay as VAT despite the burden of a high cost of living.

Zero-rated goods like maize and wheat flour, milk, bread, sanitary towels, infant formula, exercise books, and farm inputs could all attract 16 per cent VAT. But kerosene, mosquito nets, and electrical appliances, including generators, are among zero-rated good, which will be exempt.

Electricity bills could also soar because levies on power, which are now at 12 per cent, would rise to 16 per cent. Drilling for water is among the zero-rated services that will become taxable at 16 per cent.

Zero-rated

The VAT Bill proposes two rates of taxation: 0 per cent for zero-rated supplies, and 16 per cent for any other supply. It scraps the lower VAT rate of 12 per cent.

Finance Minister Njeru Githae will formally introduce the Bill in Parliament on Tuesday, when the House reopens. The changes are part of Treasury’s plans to raise the Sh1.5 trillion required for the Budget this financial year.

Over 30 Members of Parliament are urging the Government to withdraw the controversial Bill to allow further consultations. They described attempts to introduce 16 per cent VAT on previously zero-rated or tax-exempt goods and services as “a recipe for riots”. The MPs, who met in Naivasha, questioned why the Bill was being rushed while various groups had expressed reservations.

Earlier agrochemical manufacturers, importers, and distributors said they were opposed to plans to levy VAT on agricultural inputs. Members of the Agrochemical Association of Kenya termed the VAT Bill a direct threat to food security and the agricultural industry. They say it will result in a dramatic increase in prices of inputs, such as agrochemicals, fertilisers, and equipment.

Target group

But Treasury has defended their action, arguing zero-rating of consumer goods to cushion the poor had not conferred the benefit to the target group because of a liberalised economy. Zero-rating only passes benefits to supplier of consumer goods and erodes the VAT base, Treasury contends. 

Besides overhauling the value-added tax regime to make it simpler, the VAT Bill is designed to widen the revenue base by eliminating exemptions and zero-rated duties abused over the years.

In Naivasha the MPs vowed to lobby their colleagues to reject the Bill.

Former Tourism minister Najib Balala warned the sector is among the biggest losers. He said development of new hotels would be affected if 16 per cent tax on construction materials were effected.

Dujis MP Aden Duale claimed it could bring down the agriculture sector and send away investors. Duale warned capital projects like the Tatu City, Lamu Port, and Konza City would be frustrated by high costs of construction.

“We shall lobby our colleagues to reject the Bill. It is not even in line with Vision 2030,” he said.

Yatta MP Charles Kilonzo charged the Government had lost touch with the mwananchi.

“The Treasury should target real estate instead of introducing taxes on sanitary pads, food, and farm inputs as this will fuel food riots,” he said.

Gwassi MP John Mbadi said although some provisions could affect cost of basic commodities the Bill had positive sections.

“In many cases the consumer does not benefit from goods zero-rated or exempted from tax and there is need to put a standard tax rate for all goods,” Mbadi said.

Martin Kisuu, a regional tax partner with PKF accountants, accused the Treasury of trying to overhaul the current tax regime through the VAT Bill.

He urged Treasury to raise more revenue by taxing the wealthy and targeting the stock exchange instead of overburdening the poor.

Outside forces

“The Bill is being pushed by outside forces; it’s unworkable, unpopular, and could negatively affect the lives of millions of Kenyans once enacted,” he warned.

Justus Nyamunga, Director of Economic Affairs at the Ministry of Finance, in a presentation in January, explained the VAT Bill was informed by the realisation that benefits arising from tax-exemption and zero-rating measures had not trickled down to consumers.

Yet the list of items either tax- exempt or zero-rated had expanded exponentially intended to cushion the low income against prices of consumer goods such as milk, bread, maize floor, wheat flour, maize flour, and kerosene, among others.

Treasury suggested alternative measures to cushion low-income earners among them that exemption be restricted only to unprocessed goods used by the poor.

It argued the poor could effectively be shielded against higher prices through budgetary provision.