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Sick of skyrocketing cost of living? Blame it on your MP

FINANCIAL STANDARD
By Dominic Omondi | October 5th 2021

Joint parliamentary session in Nairobi on Wednesday, May 5 2021. [David Njaaga, Standard]

The recent record rise in fuel pump prices has jolted Kenyans to the core.

The increase was a double blow for many people already smarting from losing their jobs due to the coronavirus pandemic, while others have had to take pay cuts as companies struggle to stay afloat.

Many feel the government has made the cost of living unbearable by hitting petroleum products and a myriad of consumer products with punitive taxes.

Members of Parliament, who are keen to be re-elected next year, have been commiserating with irate Kenyans, condemning the national government for the current crisis.

While looking for ways to bring the cost of fuel down, the legislators have declared the Petroleum Development Levy on diesel illegal.

They also want a review of the costly deals that Kenya Power signed with various independent power producers.

However, critics say this is nothing but a campaign gimmick, with most of the lawmakers keen to be re-elected in next year’s polls.  

The MPs, led by Garissa Township MP Aden Duale, who served as Majority Leader when the levies were passed in the House, have criticised the government for “overburdening mwananchi with taxes.”

Most of the taxes, if not wasted on white elephant projects, have been used to repay debt, leaving very little for development. 

But experts insist that Mr Duale and many other MPs now throwing jabs at the government oversaw the widening of the budget deficit and the build-up of taxes by blindly rubber-stamping every proposal by the Executive. 

Now Duale, who together with Deputy President William Ruto has formed a splinter grouping within the Jubilee Party, insists the buck stops with the President. 

He said that even after the National Assembly rejected the increase and introduction of 16 per cent value-added tax (VAT) on petroleum, President Uhuru Kenyatta used his powers under Article 115 of the Constitution to overturn the decision. 

“This president is using his powers to make innocent hustlers suffer and this House cannot sit and wait,” said Duale. 

While Uhuru has occasionally vetoed the decision of Parliament, it is not lost on Kenyans that parliament rallied behind controversial laws brought by the Executive, resulting in the current economic mess. 

MP Aden Duale. [File, Standard]

Robert Waruiru, a senior tax manager at KPMG East Africa, said it is the role of MPs to make laws. 

“If the Executive comes up with a proposal which doesn’t make sense then, ideally, they are the ones who are supposed to push back,” he said. 

The Executive might be the one that comes up with a spending plan and how to finance it, but because under the current constitution the National Treasury Cabinet Secretary is not an MP, the House takes the role of developing the budget. 

This, Mr Waruiru noted, means that MPs through the Parliamentary Budget Office and the chairperson of the finance departmental committee are the ones who move all the motions. 

“If we have a problem from a tax perspective, it is squarely on the MPs,” he said.

Kenya’s desperation to service its debts - where Sh65 of every Sh100 collected in tax goes into repaying domestic and foreign loans - has seen it come up with new taxes such as the digital services tax (DST) and the minimum tax that was recently declared unconstitutional.

Kenya Revenue Authority (KRA) has said it will appeal the High Court’s decision to throw out the tax. 

Nikhil Hira, a tax consultant and director at Bowman’s Coulson Harney, said that besides the eight per cent VAT on fuel, other punitive taxes included the Railway Development Levy, Petroleum Development Levy and the inflation adjustment for excise duty. 

“Most of them are indirect taxes, it is not the income tax side,” said Mr Hira. “Certainly, what they did not do is change the income tax laws.” 

But he says that overall, Parliament has the power to reject oppressive taxes. 

Another tax expert noted that there has been a deterioration in the quality of lawmakers. 

“It could be that they just don’t understand what it is that they are passing in the Finance Act,” said the source, who requested not to be named for fear of reprisal. 

“But the MPs have an opportunity to call experts and ask them to explain the proposals.” 

Central Bank of Kenya (CBK) Governor Patrick Njoroge has warned that if nothing is done, the country could easily default on its debt obligations. 

CBK Governor Patrick Njoroge. [David Gichuru, Standard]

Kenya’s debt stood at Sh7.7 trillion as of the end of June.

And the budget deficit - or the difference between tax collected and expected spending - keeps on widening, meaning Treasury will keep on borrowing to plug this hole.  

But when did the rains start beating the country?   

Ken Gichinga, chief economist at think tank Mentoria Economics, said there is a relationship between the high taxes and the growing debt. 

“For somebody to understand our taxation journey, they have to understand our debt journey,” he said. 

He noted that when Kenya first floated the Eurobond in 2014, there was very little understanding of the debt instrument in the country. 

“At that time, it is possible that even within Parliament there wasn’t a very clear understanding of the Eurobond,” said Mr Gichinga.  

The argument at the time was that because Kenya had become a middle-income country, the Eurobond would connect it to the global credit market. 

“I believe at that time, oversight might have been weak,” Gichinga said. 

Then the strain came in 2015, with the first charge on the Exchequer being on debt. 

“It meant that whatever revenue you get, the creditors are always protected,” said Gichinga, adding that this might explain why Kenya’s bond issuances have always been oversubscribed. 

From that time, the government started to aggressively raid taxpayers’ pockets by coming up with myriad taxes. 

The introduction of VAT on petroleum was done in 2013, but the National Assembly would delay its implementation by several years.

But with the 2017 elections behind them, the lawmakers caved in. 

Also under the VAT Act of 2013, the government had introduced a law that would substantially reduce the number of goods and services previously exempt from the tax. 

The State had proposed to impose 16 per cent VAT on essential products, including bread, rice, maize flour and milk. 

On income tax, the government is now moving towards the hard-to-tax digital economy. [File, Standard]

However, after mounting opposition by civil society groups and MPs, the Act was reviewed to exempt bread, rice, milk, wheat, milk formula for infants, maize flour, first aid kits, vaccines, bandages and sanitary towels. 

“You are in a place where you need to finance your expenditure as government, yet you are not collecting sufficient taxes. The thing to do is squeeze people; for example, the VAT on fuel,” said Waruiru.  

He added that while the government might not have introduced a lot of new taxes under the current administration, it expanded excise duty - or what was known as sin tax - to products such as financial services, airtime and betting, and not just harmful or luxurious products. 

“Traditionally, excise duty was on beer, alcohol and cigarettes,” said Waruiru. 

VAT was also charged on products such as airtime and petrol. VAT is paid on the excisable amounts as well. 

On income tax, the government is now moving towards the hard-to-tax digital economy by coming up with taxes such as DST and activation of turnover tax on small businesses.  

It has also activated the turnover tax for small and medium enterprises (SMEs). 

Gichinga said the fact that the economy has not been doing well has not helped, with alarm bells starting to sound in 2017. 

Draconian measures

In 2018, the International Monetary Fund (IMF) severed links with Kenya after the country breached its debt sustainability ratios. 

And with the economy pushed into the red by the Covid-19 pandemic, the Washington-based institution engineered some of the new painful policies in a bid to help Kenya bridge its budget deficit. 

“With a weak environment, the revenue needed to service that debt is not there. And that is why you see the government has applied draconian measures,” said Gichinga. 

However, it appears like the Jubilee administration might have started on a wrong footing, with the belief that its mega projects would drive growth. 

“The thinking within government circles has been that this is what drives the economy,” said Gichinga. 

But the fact is that it is businesses that drive the economy. 

“I don’t even think it is because people don’t understand that. I just think that when it comes to fiscal government spending, there are too many opportunities for kickbacks,” said Gichinga, citing compensation for land for the Standard Gauge Railway (SGR) project as one example.

Standard Gauge Railway (SGR) at the Voi terminus. August 2021. [Elvis Ogina, Standard]

As for monetary policy, he said, it is hard to have a corrupt environment because it is all about setting interest rates and making sure banks are lending to businesses. 

Indeed, some experts reckon the runaway spending that started in 2013 has little to do with economics but more with politics. 

Uhuru and his estranged deputy Ruto took over the reins of power with International Criminal Court (ICC) charges hanging over their heads. 

As a result, the new government made the fight against the ICC its primary objective in the initial stages, according to John Githongo, an activist and former anti-corruption chief, in a past interview with The Standard. 

“They lost control over corruption at that time. It was a free-for-all,” said Mr Githongo about the bad spending habits taking root. 

Suddenly, tenderpreneurs – a new breed of opportunistic brokers who cashed in on government contracts – thrived. Costs of projects were inflated to offset kickbacks, he said. 

Tax consolidation

But there have also been good tax proposals in the last eight years. 

This includes the consolidation of tax procedures under the Tax Procedures Act. 

“That is a good one because instead of having the Income Tax procedures, VAT procedures, the Customs procedures, all these are consolidated into one,” said KPMG’s Waruiru.  

“That makes the cost of doing business easier because then you are all complying with one procedure.” 

There is also the Tax Appeal Tribunal Act, which came into force in 2013.

The first tribunal was set up in 2015. 

“The law is getting more and more complex. A tax policy, which the government is currently working on, will ensure certainty for businesses,” said Waruiru.

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