The huge number of tax exemptions proposed in the Finance Bill 2017, especially in the manufacturing sector has caused worries among key economists in the country.
They fault the rationale behind the move, arguing the ‘Mwananchi’ will lose out to big business players.
The Kenya Revenue Authority (KRA) Head of Corporate Tax Policy Unit Morris Orier, however remains upbeat about the exemptions, noting that they advised Treasury about it.
Speaking last week during a public post-budget sensitisation in Nairobi, Mr Orier urged naysayers to look at the bigger picture, saying the move will boost the economy. “It is true. The exemptions are quite a bagful. And many think that they might not have a trickle-down effect to mwananchi. I think that is more of an academic debate,” said Orier. “ The truth is that in budget making, we advised the CS on these exemptions with an eye to fostering economic growth rather than our own interest of hitting the Sh1.77 target.”
The Finance Bill 2017 is proposing VAT exemptions on locally assembled tourist vehicles, medical equipment and apparatus to specialised hospitals, inputs used in manufacture of pesticides and Sharia compliant finance products.
Court halts KRA’s Sh3.5b tax demand
Others are taxable goods for use in the manufacture of liquid petroleum gas cylinders by licensed manufacturers upon recommendation by the Cabinet Secretary responsible for Energy and Petroleum. In addition, Treasury has proposed income tax cuts on dividends payable to non-residents by Special Economic Zones (SEZ). The enterprises will be exempted from withholding tax currently chargeable at 10 per cent. Also exempted is expenditure incurred on donations to Kenya Red Cross, County Governments or any other institutions dealing with disaster management.
Enterprises licensed under SEZ will also qualify for 100 per cent investment deduction on the capital cost incurred in the construction of buildings and installation of machinery within the first year of utilisation.
Institute of Economic Affairs Chief Executive Kwame Owino says Kenya introduced a new VAT law in 2012 to simplify VAT tax codes administration on VAT.
“During that time, the administration of VAT was a huge mess. There were so many VAT refund claims especially from manufactures,” Owino said.
“There were so many goods that were exempt as well as Zero-rated. That list of goods created a lot of confusion and made tax administration costly.” Mr Owino says the intention of the 2012 law was to ensure few essential goods such as bread, flour, are zero-rated to cushion low income earners.
Other non-essential goods and services were to be taxed at a uniform rate of 16 per cent. The list is however growing longer in the Finance Bill 2017.
Some exemptions, especially those targeting Foreign Direct Investment and vehicle assemblers are a result of big business players lobbying, and Treasury bending to their demands.
“When you exempt a product, let’s say a car that is getting assembled locally, the manufacturer will incur VAT on other raw materials used to manufacture the vehicle yet cannot claim VAT refund on them, and will end up passing the cost to the consumer. At the end of the day, the consumer loses,” Owino says.
Zero-rating products – especially basic commodities such as Unga, means that the manufacturer can claim VAT refund even for the ingredients he used to mill. This means the consumer can expect a lesser price.
Economist John Mutua from the Institute of Economic Affairs opines that KRA is taking us back to the mess that existed before the 2012 law.
He argues that Kenya can’t keep zero-rating and exempting different products forever. “People lobbying and the State exempting is something that cannot be sustainable in the long-run,” Mutua says.
Owino also faulted increase in tax bands by 10 per cent to cushion low income earners, saying it will only benefit few Kenyans.