Why you will soon be paying more for flour, bread

By Morris Aron

When the prices of basic commodities go up in three month’s time, blame it partly on a loan recently advanced to the Government from the International Monetary Fund (IMF).

Credible information indicates that one of the conditions made by the IMF before approving a $420 million (Sh35.7 billion) to Treasury to ‘strengthen the shilling and tame inflation’ required that the VAT bill 2012 be passed into law, and effected.

The VAT Bill 2012 is expected to have far-reaching effects if passed by Parliament as it will hand Treasury the power to subject basic commodities such as milk, bread, maize flour and sanitary towels to value added tax without any prior approval.

Budget analysts say that the development will see the price of the basic commodities — which have never attracted tax— go up by 16 per cent upon the introduction of tax.

Other commodities that will also attract tax include sanitary towels, exercise books, infant formulae and even newspapers among other commodities.

Tax experts from KPMG noted that by passing the new VAT Bill, the Finance Secretary would only be required to carry out a gazette notice to change the level of taxation.

The revelation has left tax experts scratching their heads on the best way to address the seemingly soon to be un-popular decision to raise taxes of basic commodities. On one hand, many welcome the reforms in the tax regime that is aimed at bringing more people under the tax bracket as it means increased tax revenue.

On the other hand, increased taxation on basic commodities at a time when many are already bearing the brunt of inflation is bound to result in a lot of disquiet, erode disposable income further and lead to a drop in the level of income.

New rules

But even though the VAT Bill 2012 is a matter of discussion, Kenya already has a loan from IMF whose approval was pegged on the new rules.

In April, Treasury got the second tranche of $110.9 million (Sh9.4 billion) from the IMF under the extended credit facility (ECF) after agreeing to the terms and conditions of the IMF.

David Lipton, First Deputy Managing Director of IMF said that Kenya has important structural reforms are under way and hence the approval of the loan. “The benchmark on the submission of VAT law is set to be met by end-January 2012,” said Lipton at the time.

Only hope

“The Public Financial Management Law has been submitted to the Committee for the Implementation of the Constitution.”

Tax experts say that the only now hope lies in forging a way in the new VAT bill not to allow total control of the tax levied on essential commodities on the hands of the Treasury and at free will.