Traders raise prices of VAT exempt goods

By James Anyanzwa and Macharia Kamau

Kenya: The shock effect of the Value Added Tax (VAT) increase has thrown the country into a spin, with fears that rising commodity prices will undermine economic growth and leave Kenyans poorer.

The operationalisation of this law has seen a sharp increase in prices of essential commodities.

In characteristic market profi teering, traders have raised the prices of both vatable and VAT-exempt goods including maize fl our, rice, eggs, bread and milk.

Coming into effect at the height of a back-to-school rush, the VAT Act was particularly shocking for parents who have had to contend with higher costs of books and stationery.

And as consumers weigh theirchoices carefully for savings, their spending power is already under threat from every direction.

Already, utility firm Kenya Power has written to its customers warning of a price increase.

VAT on electricity consumption rose from 12 to 16 per cent — and to protect its margins, the utility firm has indicated it may be increasing power tariffs, backdated to September 2.

The law, that took effect on Monday, has been met with threats of lawsuits by the civil society and demands that Parliament amends the VAT Act.

Economists are now warning that the new law risks depressing the economy that was beginning to show signs of growth from an inflation-induced lull.

“The law might result in an increase in inflation in the magnitudes last seen in late 2011, when it hit highs of 19 per cent,” said Martin Napisa, the national coordinator of the National Taxpayers Association.

Prof Gerrishon Ikiara, an associate director at the Institute of Diplomacy and International Relations at the University of Nairobi, said the economy faced the danger of subdued growth.

Ill-advised move

“We will have a real danger of inflationary pressures emanating from different sources, not just VAT,” said Ikiara. Consumer lobbies are also sounding a warning that price increases are a harbinger for counterfeits and adulterated products.

This is as consumers hunt for bargains on products outside their reach and unscrupulous traders take advantage by supplying low-priced but poor quality goods.

The National Treasury pushed through the law to help raise revenue of Sh10 billion in one of its many attempts to plug the gaping Sh350 billion-budget deficit.

“The VAT Act was ill-advised. The MPs shut their ears and now it is the poor that are hurting,” Napisa told The Standard.

“As civil society, we are currently in talks on the appropriate course of action to take to protect the Kenyan taxpayer,” he said as he hinted at a multi-faceted approach to reverse the law.  “We will initiate talks with MPs to have them review the Act and if they do not listen, we are headed to the courts.”

Earlier this week, the Consumer Federation of Kenya (Cofek) also threatened to go to court, arguing that the law was taking away fundamental rights guaranteed by the Constitution. Secretary-General Stephen Mutoro said Cofek was in consultation with the Commission on Implementation of the Constitution (CIC) on the interpretation of the VAT Act alongside the Constitution.

He noted that subjecting certain essential items to VAT was akin to denying Kenyans access to basic commodities.

Workers’ incomes

“We have pointed out some sections of the Act to CIC to advise us pending our likely judicial challenge,” said Mutoro in a statement on Tuesday.  Samuel Ochieng, the chief executive officer of the Consumer Information Network, said the increase in the cost of inputs such as fertiliser and electricity would erode the spending power of many households.

“With the increase in the cost of fertiliser, prices of all food items, including maize and other cereals and vegetables, will go up. The increase in the cost of electricity will see production costs of all manufactured goods go up,” said Ochieng in a letter to the Office of the President dated September 3.

“Raising the cost of cooking gas, cooking oil and unprocessed milk would grossly affect household budgets and workers’ incomes,” he said.

Manufacturers and other companies whose products have been affected are expected to pass the costs on to consumers.

Nikhil Hira, a tax partner at Deloitte East Africa, noted that affected manufacturers and producers are unlikely to absorb the cost; they will instead pass them on to consumers.

Betty Maina, the chief executive officer of the Kenya Association of Manufacturers, said its members would adjust their prices according to their costs. “This is sure to set off an immediate inflationary pressure but we expect to stabilise in the next two to three months,” Maina said in an interview.

 Over 400 items were zero rated in the old Act, but this has reduced to less than 30, which means instances of firms claiming refunds will significantly reduce.

Kenya Revenue Authority (KRA) Commissioner General John Njiraini said the amount of money that local firms are claiming from the institution had grown to Sh28 billion as of July this year.

But the taxman is optimistic the amount of refundable tax could drop by 50 per cent to Sh600 million every month from Sh1.2 billion annually.

Companies used to pay the 16 VAT on items that were zero-rated in the previous legislation then claim the same from the government.