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Unpacking the impact of Finance Bill 2024 on the healthcare industry

Opinion

The government’s financial year  24/25 budget theme is “Sustaining Bottom-up Economic Transformation Agenda for Economic Recovery & Improved Livelihoods.”

One of the government’s five priority areas in this year’s Budget Policy Statement is healthcare.

There are several proposals in the Finance Bill 2024 that will affect the heath sector. One example is the proposal to introduce tax deductions on contributions to the Social Health Insurance Fund (SHIF) and post-retirement medical funds.

The proposed monthly limit for the latter will be set at Sh10,000. This proposal is beneficial to taxpayers as the amounts would be deducted when determining their taxable income, resulting in a lower tax liability.

Another positive proposal is the introduction of exemptions from Import Declaration Fees (IDF) & Railway Development Levy (RDL) on inputs, raw materials and machinery used in the manufacture of mosquito repellents.

If passed, this would reduce costs associated with the manufacture of mosquito repellents to help reduce malaria prevalence in Kenya. This is helpful given the heavy rains and floods Kenya has experienced in recent months.

The Bill has also proposed to change the VAT classification of mosquito repellents as well and inputs and raw materials used in their manufacture from standard rated to exempt. While the ideal move would have been to zero-rate the products, the change from standard rated to exempt will result in a slight reduction in the cost of the products if the benefit is passed on to the consumers.

There are other proposals contained in the Bill that will have a negative impact of the healthcare sector. On VAT, the Bill proposes to limit exemption on insurance and reinsurance services to premiums. This will lead to higher medical insurance costs as insurers increase their prices by subjecting other insurance services such as agency and administration to VAT.

This would hamper the government’s stated goal of achieving universal healthcare coverage which currently averages around 26 per cent, with those at the bottom of the economic pyramid having the least coverage at less than 5 per cent.

Other potentially harmful proposals include the move to reclassify from exempt to standard rated taxable goods for use in the construction and equipping of specialized hospitals with a minimum 50-bed capacity.

Similarly, taxable services for direct and exclusive use in construction of specialized hospitals with accommodation facilities are proposed to be moved from zero-rated to standard rated.

These two proposals would lead to increased costs of hospital construction, which will be passed on to consumers in form of higher medical costs. This is especially poignant given that the 2024 Economic Survey published by the Kenya National Bureau of Statistics indicated that the number of health facilities decreased by 8.8 per cent to 15,070 in 2023.

This was despite an increase in Level 4 hospitals to 1,020 in the same period. Further, in FY 2022/23 the Ministry of Health undertook a health facilities census of equipment at all health facilities in Kenya, both public and private. The census revealed a large gap in equipment with some facilities lacking up to 70 per cent of key equipment for the level of the hospital.

The Bill also proposes to remove the VAT exemption on local and imported goods and services purchased by companies operating under a special framework arrangement entered by the Government on or after July 1, 2017. Initially, this exemption was introduced to curb the spread of Covid-19 and reduce costs of treating ailments by encouraging local manufacturing of the vaccines.

The proposal was further amended by the Finance Act 2023 to include other manufacturing activities including refining. This proposal creates ambiguity as it affects any agreements signed by the government which encouraged significant capital investments in manufacture of human vaccines or other manufacturing activities. If passed into law, this is likely to hamper the development of healthcare and manufacturing industries.

Based on the Finance Bill proposals highlighted above, the government should adopt a holistic approach in undertaking interventions in the health sector that would lead to increased investment, reduced costs, and wider medical access for all Kenyans.

Michael Ikiara is a tax manager with KPMG Advisory Services Limited. The views and opinions are those of the author and do not necessarily represent the views and opinions of KPMG.

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