Proposed Vat increase is not a solution to an ailing economy

By Billow Kerrow

The VAT Bill expected in Parliament next week is likely to raise questions on the Government’s commitment in addressing the high cost of living that has driven nearly half the population below the poverty line. 

The Bill will eliminate most zero-rated or exempt categories, and eliminate all other rates except the 16 per cent and zero-rate. The impact is a 16 per cent VAT rate on some basic commodities that enjoy zero-rate now, and a higher rate for others previously taxed at 12 per cent or lower. It all means, higher prices for basic goods.

The Treasury has long argued that zero-rating consumer goods has done little to cushion the poor, as the benefits rarely trickle down past the suppliers.

Prices of our staple foods have over the years gone up significantly despite the zero-rating, with marketers citing higher inputs and manufacturing costs. The Treasury and KRA believe other alternatives should be found to cushion the poor rather than erode the tax base. They do not mind zero-rating unprocessed goods, which is passed on to consumers.

Of course, Treasury may have a point.  But raising VAT taxes is regressive and will hurt the poor more. Studies conducted recently by the Institute of Fiscal Studies when the UK Government raised VAT rates from to 20 per cent revealed that the bottom 30 per cent from income were hit twice as much as the top 10 per cent. In other words, it hit the poor twice as much as it hit the rich. The poor spend a higher percentage of their incomes on basic commodities than the rich.

The flip side of the VAT raise is why Treasury should be keen on collecting more revenue when it should have focused on fiscal discipline. Our Government lives ostentatiously large on taxpayers sweat.

There is a lot of wastage and extravagance of public resources by a bloated public service. Nearly 30 per cent of the budgeted expenditure is pilfered through procurement of goods and services.

There has been little or no attempts to restructure the public service to deliver greater productivity and cut consumption expenditure. The Government resorted to borrowing big time to sustain this life, with a resultant public debt of Sh1.5 trillion.

True, most countries use other measures to cushion the poor against rising cost of living. In US and Europe, it is the farmers who are subsidised.

We tried this by zero-rating or exempting agricultural tools and equipment, and inputs such as fertilisers. We also had cheap loans to farmers and write-off of farmers’ debts. It has not helped in reducing food prices or enhancing our food security. In developing countries, Governments usually resort to subsidising food prices by zero-rating the final products, a measure that Treasury believes is not working.

In Egypt, bread prices are subsidised by up to 96 per cent. In Ethiopia, food subsidies work pretty well, with a surcharge of 10 per cent on luxuries to finance it. No Government will enjoy legitimacy if its people are starving. Other alternatives do not work well in a country where corruption is high.

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