Tough times as new taxes take effect today

Treasury Cabinet Secretary Henry Rotich at a past function. (David Njaaga, Standard)

Starting today, you will pay more for a number of goods and services as some of National Treasury’s far-reaching tax measures take effect.

Mobile money transactions, bank transactions for amounts over Sh500,000, kerosene, bottled water, chocolate are some of the items whose prices will go up after Treasury Cabinet Secretary Henry Rotich slapped them with additional duties.

This is in line with the requirement of the Excise Duty Act, 2015 that any changes to the rates of excise duty be adjusted on July 1 of every year. However, members of Parliament have 90 days since the day Rotich read his budget speech to interrogate other tax changes proposed by Treasury in the Finance Bill, 2018.

Already a number of players with a stake in markets of these products- including businesses and regulators- have made necessary adjustments in compliance to Rotich’s proposals.

Energy Regulatory Commission (ERC) was the first to fire the shots of compliance, recalculating the maximum pump prices for kerosene for the period between July 1 and July 14.

ERC said that in the pump prices published June 15, had not factored the increase of Sh3.1 per litre in excise duty for Kerosene as proposed under the Finance Bill 2018.

"As a result, the Commission has recalculated the maximum Pump prices for Kerosene that will be in force from July 1 to July 14, 2018 taking into account the additional duty," said ERC in a press release signed by its Director General Robert Pavel Oimeke.

"Mr  Speaker,  Under  the  Excise  Duty  Act,  illuminating  kerosene  attracts  a duty  rate  of  Sh7,205 per 1000 litres while gas oil is subject to excise duty at the rate of Sh10,305 per 1000 litres,” said Rotich noting that the different difference  in  the  rates  applicable  to  the  two  petroleum  products  had  led  to adulteration  of  the  fuel  products.

This, he noted, had resulted in loss of excise duty revenue to the Exchequer. “Mr Speaker, in order to reduce the incidence of adulteration of fuels, I propose to harmonise the rate of excise duty applicable on illuminating kerosene to Sh10,305 per 1000 litres," said Rotich.

Critics have said that the increase will hurt low income households across the country who use kerosene for lighting and cooking.

Although expenditure on kerosene by the poor in Nairobi is negligible compared to other consumer products in the cost of living index, demand for the commodity has been on a surge. In 2017, 448,000 tonnes of kerosene were consumed, a 20 per cent increase from 372,000 tonnes consumed in 2016.

Audit firm PricewaterhouseCoopers (PwC) said while the decision to increase taxes on kerosene is good news for owners and operators of vehicles and machinery who have historically suffered higher maintenance costs as a result of fuel adulteration, the poor will be hurt by the fresh measures.

"However, these actions will increase the cost of living for low-income households who still rely on kerosene for lighting, cooking and heating, after the rise in the cost of charcoal and firewood following the recent logging ban,” said PwC.

Mobile money transactions have also gone up. Already some mobile money service providers and banks have notified their customers of these changes.

Safaricom’s M-Pesa, the country’s largest mobile money service provider, yesterday adjusted their tariffs upwards in line with Rotich’s directive. "Pursuant to The Finance Bill 2018 and The Provisional Collection of Taxes and Duties Act, we have made the following adjustments to our M-Pesa Tariffs,” said Safaricom in an advertisement published in a local daily.

Withdrawal charges from an M-Pesa agent have also gone up. M-Pesa customers who intend to withdraw between Sh501 and sh35,000 will pay increased fees.

Curiously, those withdrawing large amounts of money, between Sh35,001 and Sh70,000 will see their charges go down by between Sh5 and Sh30.

In his budget speech, Rotich proposed to increase excise duty on mobile money transactions to 12 per cent from 10 per cent, a move that is likely to hit the poor the most.

Those sending Sh500,000 and more through banks and other financial institutions will also surrender 0.05 per cent of their cash to the taxman, as the Government sought to take from the rich to finance one of President Uhuru Kenyatta’s Big Four Agenda, Universal Healthcare.

"Mr  Speaker, our economy has a well-established financial sector in the region with significant sums of money  transferred  monthly. In order for the Government to get a fair share of revenue from these financial activities and  to finance critical Government programmes, I propose to introduce a Robin Hood Tax of 0.05 per cent on any amounts of five hundred thousand shillings or more transferred through banks and other financial institutions."

“In addition, I have increased excise duty fees charged on money transfer services by cellular phone service  providers from 10 per cent to 12 per cent. The revenue realised from these measures shall be used to fund Universal Health care."

In 2016/17 financial year, the value of mobile money transactions by six mobile money transfer services were a massive Sh4.6 trillion with 44 per cent of these transactions, about Sh2.05 trillion, being person-to-person.

As at April 2018, KRA had collected Sh132.2 billion in excise taxes compared to Sh134.6 billion, according to data from the Central Bank of Kenya (CBK).

Although there is no breakdown of how various activities contributed to the total excise duty, past figures show that levies from financial transactions contributed an average of 14 per cent of the total collected. Besides mobile transfer services such as Safaricom’s M-Pesa and Airtel’s Airtel Money, digital credit providers have also joined the fray of mobile money.

Some of the digital credit services are offered by the four largest banks - KCB, Equity, Barclays and Co-operative Bank. There has been also a growing number of fintechs and non-bank institutions.

Yesterday, most banks also notified their customers of the new changes.

"Dear customer, in line with the 2018 budget, we will charge Excise Duty of 0.05 per cent on bank transfers of Sh500,000 and above, while Excise Duty on mobile transfer fees will increase from the current 10 per cent to 12 per cent. For more details, please contact your Branch,” read a text message from Barclays Bank.

Other change that will start taking effect is demurrage charges made to non-resident persons to withholding tax at  a rate of twenty per cent.

A demurrage charge paid to non-resident ship operator will start attracting a withholding tax of 20 per cent on the gross amount. However, experts fear that this will affect local importers as non-resident ship operators will not agree to pay.

"In practice, it is unlikely that the ship operators who are non-resident will agree to bear this tax, leaving the local importers or their agents to bear the tax costs, hence increasing the cost of freight,” said audit firm PwC in their analysis of the budget.

PwC also adds that extending withholding tax of five per cent on insurance premiums payable to non-residents will increase the cost of insuring certain risks overseas. Some of those risks, unfortunately, cannot be insured locally. This measure will also come into place today.

"This taxation measure is likely to increase the cost of insuring certain risks, as foreign insurers or reinsurers are unlikely to accept this tax as they have no taxable presence in Kenya,” said PwC, noting that this will leave Kenyans to bear the tax.

Owners of fuel guzzlers will also feel the wrath of the taxman, with Rotich’s proposal to increase excise duty from 20 per cent to 30 per cent on private passenger motor vehicles whose engine capacity exceeds 2500cc for diesel and 3000cc for petrol powered vehicles expected to also kick in today.

Bottled water will also attract an excise duty of Sh5 per litre, a situation that will the price of this product that has become popular in most households go up.

Sugar confectionery, including white chocolate will attract a duty of Sh20 per kilogram. Sugar confectionery includes sweets, candied nuts, chocolates, chewing gum, bubble gum and many other products that contain sugar and carbohydrates.

The Government is keen to collect more taxes from Kenyans, having run out space to chalk up more debt.  

There were questions as to how the government would finance the expansive Big Four Agenda. Rotich answered these by going after activities and items associated with the poor like mobile money transfer, betting and kerosene.

"I propose to amend the Income Tax Act to clarify that the revenue realised from the tax on winnings shall be used for the development of sports, arts and cultural activities for the youth, as well as critical social development initiatives including UHC,” said Rotich.

Some observers have termed Rotich's budget as not pro-poor, with the CS proposing to raid mama mboga, jua-kali artisans and kiosks through a presumptive tax of 15 per cent that will be factored into their business permits.

This new measure will see Treasury rope in 1.56 million licensed micro, small and medium establishments (MSMEs) and 5.85 million unlicensed businesses in the country, according to findings in a survey by Kenya National Bureau of Statistics.

Unfortunately, these are businesses that are already struggling to survive and any new tax measures could see the already alarming rate at which they collapse, currently at 46 per cent in the first year, go up. This could pose a serious threat to economic recovery, which Rotich badly needs to boost his dwindling revenues.

Unfortunately, these are businesses that are already struggling to survive and any new tax measures could see the already alarming rate at which they collapse, currently at 46 per cent in the first year, go up. This could pose a serious threat to economic recovery, which Rotich badly needs to boost his dwindling revenues.

Legislators have 90 days to debate and pass the Finance Bill.

Samuel Mwaura, a Partner of taxation at Grant Thornton, said that out of practice, there is also an assumption that all these proposals will be approved. "You saw the proposal to put an income tax of 35 per cent on those who earn Sh750,000 was removed after discussion with MPs," said Mwaura.