Sh2.1 trillion balancing nightmare for Treasury CS Henry Rotich

Treasury Cabinet Secretary Henry Rotich is today expected to present to Parliament a Sh2.1 trillion Budget, expected to raise more revenues to fund the country’s growing development expenditure while seeking to balance several competing social needs.

While millions of Kenyans are hoping for a favourable expenditure plan, this year’s budget comes ahead of the expiry of a three-year transition period at the end of which consumers are expected to start paying Value Added Tax (VAT) on petroleum products.

An additional tax of 16 per cent (assuming VAT figure remains the same) on petroleum oils, motor spirit, kerosene-type jet fuels and the like from September next year will massively affect several sectors, including manufacturing and trigger a rise in prices of basic commodities.

The VAT Act 2013, which laid out the grounds for the proposed tax whose implementation will begin September next year provided for a transitional period of three years during which the products were to be VAT exempt. The transitional period ends on September 1, 2016.

Several Kenyans expressed hope the spending plan would target to bring down the cost of living. Those who spoke to The Standard expressed optimism that the State would put in place measures to arrest the burgeoning cost of living. Many Kenyans have cited high food prices as their major concern in recent opinion polls.

Henry Njaga, who spoke to The Standard yesterday, said life had become too expensive and asked Rotich to address the high cost of essential commodities.

“I am looking forward to a more mwananchi-friendly budget that will ensure prices of essential commodities and foodstuff like maize flour and milk are affordable and available,” said Njaga, a car-wash attendant in Mombasa.

Below targets

His views were shared by many across the country. Florence Atieno, a small time trader in Kisumu wants Rotich to allocate more money for governors to “ up more roads” to address the cost of food.

Unga, which is used to make Ugali-the staple food in many households-is retailing at over Sh110 for a two-kilogramme packet, which is about half the daily wage for most casual workers in the country.

Other foodstuffs like tomatoes are also retailing at record prices with several retailers selling three fruits at Sh20.

But the CS has a much bigger worry than the individual citizens, at least in absolute numbers.

The Cabinet has approved plans to spend Sh2.1 trillion in the financial year that begins in just under three weeks.

The spending will be from projected earnings of Sh1.358 trillion, described by some analysts as very ambitious.

There is good reason to believe the revenue targets might not be achieved, given the precedence set by the Kenya Revenue Authority (KRA) – the tax collection agency, whose collected revenues have consistently fallen below its set targets in the recent past.

Last year, KRA surpassed its 2013/2014 full year target collection by Sh100 million, but only after a downward revision of its original target of Sh973 billion. It collected Sh963.8 billion in taxes during the period.

Faltering prospects in pillar sectors of the economy such as agriculture and manufacturing were to blame for the downward review.

By the half-way mark of the current financial year, revenue collection was off target by Sh43 billion, nearly an eight per cent variance.

The State said it was unable to collect as much tax from workers as income tax, and VAT – which is raised from consumption of goods and services.

It is in the projected revenues in the next financial year, however, where the trick for Rotich and pain for taxpayers lies, considering the expenditure will largely be funded from direct and indirect taxes paid by Njaga and other Kenyans, who are already feeling overburdened.

This is the country’s largest budget in history underpinned by President Uhuru Kenyatta’s commitment to develop massive infrastructure projects like the Sh327-billion Standard Gauge Railway, and devolution.

While the major infrastructure projects are expected to deliver massive benefits for the economy through cheaper energy and lower transport costs, citizens have to foot the bill, whichever way.

For Rotich, the options will be to either raise taxes or borrow. Either way means more pain for the citizen.

Already, Rotich is considering both options, according to projections by financial services firm PwC.

“We expect that the renewed reforms will focus on making the tax system less arduous for the average tax payer,” says Gideon Rotich, the manager in charge of tax services at PwC. The CS also plans to review the consumption taxes, also known as VAT.

In the plans, petroleum products will be taxed at a uniform rate of 16 per cent, taking away the relief enjoyed by manufacturers and motorists. Any increase in petroleum prices tends to affect every household through higher fares and costlier production prices that are eventually passed on to the end consumer.

“Will the Cabinet Secretary address the expected policy shift in the upcoming budget cycle? It remains to be seen,” PwC’s Rotich told The Standard on the planned review on taxing petroleum products.

Other soft targets are in leisure tax – also known as excise taxes, which are levied on non-essential consumption like luxury goods, beer and cigarettes.

A rather surprising finding from an earlier survey done by the Institute of Economic Affairs – another independent policy think-tank, however found that beer consumers felt that they were already paying too much in taxes.

Respondents to the survey felt spirits should be taxed more but other consumption taxes should be slashed since life had become difficult.

Parliament’s own budget office has thrown cold water at Rotich’s revenue projections.

A critic of Treasury’s proposed budget compiled by the budget office said there are “no concrete measures to increase efficiency in expenditure and increase in revenue”.

“..this seems rather an ambitious target since the total expenditure for the Government has grown to Sh1.88 trillion from Sh1.69 trillion...” reads the report in part.

Other Kenyans like Jeremiah Mwaniki, a fruit vendor, feels he is not inspired and excluded in the budget-making process. “Year in year out, there has been no considerable change in how the budgetary estimates affects the mwananchi,” he said.