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It’s pain, tears and debt in Yatani’s budget

NATIONAL
By Macharia Kamau | June 11th 2021
Treasury Cabinet Secretary Ukur Yatani holds up the briefcase containing the Budget for the 2020/22 financial year outside the Treasury building, Nairobi. [Elvis Ogina]

The cost of living is set to go up over the next 12 months as the National Treasury raids your pockets through increased taxes in a bid to shore up dwindling revenues.

Among the tax measures that Treasury has proposed are expected to result in an increase in the cost of bread, baby formula and cooking gas, which have been slapped with Value Added Tax.

It will also cost you more to buy a motorcycle, with importers of the popular mode of transport now required to pay excise duty at a rate of 15 per cent compared to a flat rate of Sh11,608 currently.

The cost of borrowing is also set to go up, with Treasury slapping borrowers with a 20 per cent excise duty on loan fees.

Gamblers will also pay a 20 per cent excise duty on the amount that they plan to stake if the proposals in the Finance Bill, 2021 sail through the National Assembly.

Treasury appears to be running out of options to widen the country’s tax base, instead choosing to focus on deepening collection to bridge the gaping revenue gap.

In subsequent budgets, Treasury’s attempts to bring the informal sector into the tax net have not borne much fruit, which has seen it turn to such sources as Value Added Tax (VAT) that has traditionally been low-hanging fruit for the Exchequer.

The new tax measures are meant to enable the Kenya Revenue Authority (KRA) to meet an ambitious ordinary tax revenue collection target of Sh1.78 trillion over the 2021/22 financial year, up from Sh1.57 trillion in the current financial year that ends on June 31.

Recent attempts to grow the tax base through such measures as the turnover tax that targeted small business and rental income tax for landlords have not yielded much for the taxman.

KRA had expected the minimum tax, which would require loss-making firms to pay one per cent tax on gross turnover, to also play part in growing tax revenues but hit a snag earlier in the year after a court suspended it pending the hearing and determination of a case on its constitutionality.

In the Finance Bill 2021, Treasury appears to have put in little effort in growing the tax base.

While Treasury has proposed increasing the cost of basic commodities, such as bread and cooking gas, these may not significantly grow tax revenues over the next financial year.

“You could say they have expanded the tax base by taxing supply of ordinary bread at 16 per cent and cooking gas. To that extent, you are increasing the tax base because more people will pay the tax,” said Nikhil Hira, a tax expert and a director at law firm Bowman’s Coulson Harney.

“What they have not done is perhaps look at people who have an income but not declaring and therefore, possibly, evading tax… (as it is) there is nothing really that tries to bring these people into the net.”

Other proposed tax measures in the Finance Bill include the digital services tax, which Treasury Cabinet Secretary Ukur Yatani said would apply to multinational entities that sell products in Kenya through online platforms.

It is also eyeing a 10 per cent excise duty on jewellery, an increase of withholding tax for subcontractors in the petroleum and mining industries to 10 per cent from 5.65 per cent.

Yatani said the move to increase the withholding tax rate would “align the rate of withholding tax on service fees in the extractive industry that is withheld in respect of management and professional services under the same sector. “This will remove ambiguity and manipulation that result in leakage of tax revenue through re-characterisation of income,” he said.

Yatani together with his counterparts from the other East African Community states has adopted protectionist measures for local industries.

Local manufacturers have had to contend with undue competition from cheap imports, mainly from China.

In a bid to protect them, EAC finance ministers agreed to impose customs duties on such products as steel, furniture and some food produce.

“During the EAC Pre-Budget meeting, the ministers noted with concern the proliferation of cheap imports into the region and agreed on measures to protect locally manufactured products from unfair competition,” Yatani told Parliament yesterday.

“In order to continue protecting this sub-sector, the EAC partner states agreed that imported iron and steel products shall continue attracting a duty rate of 25 per cent with the corresponding specific rates for a further one year.”

And to protect farmers and the (agricultural) sector from cheap imports, the regional states agreed that vegetable products, including potatoes, peas and tomatoes shall attract a duty rate of 30 per cent for one year.

Leather product into EAC will also continue attracting a 25 per cent duty. Additionally, the CS said, Treasury would introduce a further specific duty rate to guard against undervaluation, whereby importers undervalue to pay lower duty rates.

Yatani said local manufacturers of baby diapers would continue to import duty-free. The incentive was introduced last year and according to the CS, it has had the impact of growing the local industry.

Ken Gichinga, the chief economist at Mentoria Economics, questioned the prudence of pursuing consumption taxes like VAT that have a devastating impact on a majority of Kenyans, already battered by the Covid-19 pandemic. 

“When you add consumption tax, that is very destructive to the economy. We need to be cautious with consumption tax because a lot of people have lost jobs or coping with reduced salaries. It also hits the poor disproportionately,” said Mr Gichinga.

“The new thinking has to be non-consumption tax. there are more opportunities at the county level than at the VAT level. What counties are doing with own-source revenue? They are barely scratching the surface,” he added.

The Parliamentary Budget Office (PBO) noted that Treasury’s proposals contained in the Finance Bill, 2021 are unlikely to grow substantially.

PBO, which advises Parliament on budget issues, noted that Treasury has in the past made attempts to bring the informal sector into the tax net.

“Taxation of income from the agriculture sector and the informal sector has been a challenge for Kenya and other developing countries. Major changes to the tax code, such as the implementation of the presumptive tax, in the past, have unsuccessfully attempted to formalise part of the informal agricultural sector,” said the Budget office.

“Further, attempts such as the introduction of advance tax have not been successful in enhancing revenue collection from the informal sector. Therefore, revenue enhancement policies that do not incorporate a solution to taxation of the informal sector and the agriculture sector are unlikely to significantly expand the tax base.”

It also noted that KRA’s target to collect Sh1.77 in ordinary revenues is based on assumptions that the economy would fully recover.

A major risk, however, is that there could be more waves of the Covid-19 pandemic that could hurt the economy more, especially consider the lacklustre manner in which the country has been administering Covid-19 vaccines.

“It should be noted that revenue targets are based on the expected recovery in economic growth and the assumption that more severe coronavirus mitigation measures will not be implemented in the coming financial year,” said the Budget office.

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