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President offers 8 per cent VAT, asks Kenyans to brave pain of new Constitution

By Macharia Kamau | Published Sat, September 15th 2018 at 00:00, Updated September 15th 2018 at 00:11 GMT +3
President Uhuru Kenyatta

In summary

  • Uhuru proposes 8 per cent VAT rate and slashes Sh52b in government spending
  • President labels MPs decision to suspend fuel levy as good politics but bad leadership
  • All eyes now on Parliament as MPs summoned to special sitting to discuss the Finance Bill 2018

In an admission of the tough times ahead, President Uhuru Kenyatta proposed to cut by a half the 16 per cent VAT imposed on petroleum products, then announced a raft of austerity measures expected to save the government Sh52.6 billion this financial year.

Addressing an expectant nation, the President signified his resolve to deal with wastage in government by proposing to allocate more resources to institutions in the frontline in the war against corruption, chiefly the Judiciary and the investigative and prosecutorial agencies.

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The price of super petrol will drop to Sh118 from Sh127.8 per litre in Nairobi, while that of diesel will drop to Sh107 from Sh115, if MPs accept the President’s proposal contained in a memorandum to Parliament when he returned the Finance Bill 2018 on Thursday for re-consideration.

He said the Finance Bill 2018 fell short of acceptable threshold as it only protected the status quo and sacrificed the bigger vision.

Easy path

“It took the easy path, instead of rising to the challenges of our time. It was good politics, but bad leadership,” he said.

Kerosene, largely used by the poor for lighting and cooking, will go down to Sh90.89 from Sh97.41.

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MPs, however, have the option of turning down the President and pass the Finance Bill 2018 in the form they passed it on August 30, but which would require two thirds of the MPs to pass.

Coming in the wake of two weeks’ outcry over the increasing debt burden, the announcement -- by a Government intent on retaining the taxation to bridge financing gaps in this year’s budget -- met mixed reception by long suffering Kenyans, who expected the President to completely do away with the new revenue measures.

The President’s bid was meant to soften the blow, but there were fears Friday that the cost of living could only get worse in days to come as more businesses factor in their products the high fuel charges on realisation that the VAT on fuel is not going away.

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Uhuru was optimistic that Parliament will accept his proposals, and urged all business owners to lower their prices commensurately with the decreased VAT on petroleum products. 

“Just as business owners took the new VAT rate as an opportunity to increase the cost of goods and services, I expect them not to take advantage of weary citizens, and to lower their prices commensurately and without delay,” appealed Uhuru.

The President’s decision comes in the wake of caution by industry players that have, over the last two weeks, called on it to scrap VAT on fuel, noting that it might have an impact of slowing down the economy and an overall stagnation or even decline in tax collections.

President Kenyatta’s proposal, if accepted by Parliament, will see the government raise Sh36 billion in revenues from VAT on petroleum products against the Sh71 billion it had expected to get when charging 16 per cent VATrate.

In the televised address to the nation, the President defended the imposition of VAT on petroleum products as necessary for the country to meet its budgetary obligations.

“It is clear that you are all troubled by the effect of the rise in the prices of petroleum products, and its impact on the cost of living,” he said.

“I have heard and understood your concerns, which is why I have proposed… to cut VAT on petroleum products by 50 per cent, from 16 per cent to eight per cent.”

ALSO READ: Uhuru proposes reduction in fuel tax

The Speaker has called for special sessions of Parliament on Tuesday and Thursday next week to deliberate on the President’s recommendations.

Speaking at State House Nairobi, the President noted that despite making concessions in proposing a 50 per cent cut in the VAT rate, the country was still in deep problems and needed to figure out how to finance its budget, whose deficit has grown to Sh600 billion, with tax revenues projected to be in the region of Sh1.8 trillion this financial year.

This means that Kenya’s targeted fiscal deficit will rise to six per cent, from a targeted 5.7 per cent.

To bridge the deficit, the government would be making some major cuts on some non-essential expenditure.

“I have also proposed wide-ranging cuts in spending as well as austerity measures across all arms of government. The cuts target less essential spending, such as hospitality, foreign and domestic travel, training and seminars, and similar categories,” he said.

Eyes on MPs

“These budget cuts ask of us in government that we tighten our belts. It also ensures that the sacrifices made by tax-compliant Kenyans are matched by discipline from all of us in the public service.”

Some of areas that have been earmarked for budget cuts include the Equalisation Fund, which advances funds to marginalised areas; roads that were damaged during the long rains season; the National Government Constituency Fund, which is overseen by MPs, and budgets for Parliament and county governments.

According to a breakdown seen by the Saturday Standard, the government plans to save Sh52 billion from the areas selected for cost cutting. Most affected are roads damaged by the recent floods (Sh8.7 billion), the Equalisation Fund (Sh3.8 billion), the mnational government CDF kitty (Sh5.96 billion) and allocations to the National Assembly and Senate whose budget will be slashed by Sh5 billion.

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The counties’ shareable revenue will be cut by some Sh9 billion while cutting down on hospitality and foreign travel will save Sh4 billion. The Consumers Federation of Kenya (Cofek) said the reduction of the VAT rate to eight per cent would not make much impact among Kenyans.

“We urge all Kenyans from all walks of life to urge their MPs to show up in Parliament and defeat proposals by the President,” said the lobby in a statement.  

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