Kenyans should brace themselves for higher taxes after the Government caved in to the International Monetary Fund’s (IMF) demands.
Treasury agreed to tough conditions spelt out by IMF, including the repeal of some tax exemptions enjoyed by key sectors of the economy.
It made the commitment to the IMF in a letter of intent that spells out a raft of measures that are likely to eat into consumers’ pockets.
One of the key conditions accepted by the Government is a removal of some tax exemptions that will weigh on some sectors of the economy. The sectors to be hit include agriculture, manufacturing, education, health, tourism, finance, social work, and energy. A tax haven for milk, maize flour, and sugar will come to an end in the next financial year.
Treasury has indicated that petroleum products, which had been exempted from consumption tax, will attract 16 per cent VAT beginning September in a move aimed at complying with a deal Kenya made with IMF in 2015.
Treasury expects to get an extra Sh17 billion from taxes on petroleum products.
According to the World Bank, there are about 30 tax-exempt income categories accounting for 88 per cent of total exemptions.
The Government hopes to squeeze an extra Sh40 billion in taxes from these sectors. This is likely to have a ripple effect by pushing up the cost of goods and services currently enjoyed at a discounted level.
Besides removal of tax exemptions, the National Treasury and the Central Bank of Kenya (CBK) have promised IMF to either remove or modify interest rate caps and delay the implementation of some development projects as a condition to access IMF’s Sh150 billion precautionary loan known as the standby arrangement (SBA).
Kenya has been granted a six-month extension on the standby arrangement to work on the IMF-driven proposals and be allowed to access the credit facility should the economy suffer an external shock.
National Treasury Cabinet Secretary Henry Rotich and Central Bank Governor Patrick Njoroge, in the letter of intent to IMF's president, Christine Lagarde, said the proposals would be included in the upcoming budget to be tabled in Parliament in June.
The two assured Ms Lagarde that they would meet all IMF's tough conditions, including cutting fiscal deficit - which occurs when a government's total expenditures exceed the revenue that it generates - by almost half by the end of financial year 2018/19.
"In light of the revenue shortfalls so far this year, to achieve the fiscal deficit target for 2017/18, we have introduced specific revenue administration measures that are under implementation, and identified specific spending cuts," said Mr Rotich and Dr Njoroge.
For the current financial year ending June, the two policymakers promised to delay the implementation of what they described as 'lower-priority' investments, a situation that will certainly stem the flow of cash to thousands of Kenyans.
However, for the next financial year starting July, they promised to increase tax collections.
"To achieve the fiscal deficit for 2018/19, we commit to introduce, through the Finance Bill 2018, revenue raising measures, including removal of some tax exemptions and improvements in tax administration," they said.
IMF wants Kenya to shift from the current position where a huge chunk of its budget is financed through borrowed cash. The global lender expressed fears that should the Government not tame its appetite for debt, it would soon rise to about 60 per cent of its gross domestic product.
The Government’s appetite for borrowed cash has seen public debt swell to Sh4.6 trillion, raising a storm in various circles.
The shift in policy will see the Kenya Revenue Authority (KRA) aggressively move to raid the pockets of Kenyans who are just recovering from tough economic times occasioned by a crippling drought, reduced credit, and prolonged electioneering period.
Experts, however, think the overhaul of most of the tax exemptions was long overdue, with some of them having outlived their usefulness.
Kwame Owino, the CEO of the Institute of Economic Affairs, said studies had shown that exemptions given to attract investments, such as in special economic zone, do not affect investments anymore.
Philip Muema, a tax expert and founder of business advisory Nexus, argued that some tax exemptions have been abused in the past, so the Government would be creating a level ground where everyone would pay tax.
He explained that while the proposals would hurt consumers in the short term, in the end Kenyans would benefit as there would be more money in circulation as the Government would stay away from borrowing locally and crowding out the private sector.
However, he proposed that the Government postpone implementation of the 16 per cent VAT on petroleum as it would only add to the cost of living.
“The Government should postpone it (tax on petrol) to cushion Kenyans against some additions to cost of living,” said Muema.
Treasury has indicated that it will overhaul the Income Tax Act to address taxes charged on employees’ salary through Pay As You Earn).
“The Government will implement various measures to boost revenue mobilisation. These measures will include complete overhaul of the current Income Tax Act, strengthening tax administration, and expansion of the tax base,” said Treasury in the Draft 2018 Budget Policy Statement.
The Government intends to increase income tax by over Sh100 billion in the financial year 2018/19.
Kenya seems to have taken the cue to get rid of tax exemptions from yet another Bretton Woods institution - the World Bank.
In its December 2017 Kenya Economic Update, the World Bank called for the removal of tax exemptions, joining IMF in piling pressure on Kenya to undertake the much-delayed fiscal consolidation - or painful policies undertaken by governments to reduce their budget deficits and accumulation of debt stock.
"Any rationalisation of the corporate income tax (CIT) exemptions regime, therefore, should have a focus on these sectors, to the extent that the specific tax exemptions being enjoyed in these sub sectors are no longer a priority within the national development agenda," said the World Bank's report. CIT is levied on income - profit - made by legal entities.
The deal has alarmed the Consumer Federation of Kenya, which has warned that the Treasury proposals would hurt the ordinary mwananchi, particularly if it touched VAT.
"If they amend figures on VAT, then this is going to raise the cost of living on basic commodities such as food," said Stephen Mutoro, the head of lobby group.