IMF backs amendments to VAT law

IMF Africa department assistant director Domenico Fanizza. FILE 

By GEORGE NGIGI

In Summary

• The IMF says Kenya joins modern economies with changes in the taxation Act.
• The IMF argues that revenue collection has not kept pace with the rise in Kenya’s expenditure, hence the need for the new tax.
• The Treasury expects to collect Sh10 billion more in the current fiscal year from the new VAT measures.

The IMF has backed the recent amendments to the VAT law, arguing that they are necessary help the Treasury plug the huge national budget deficit and also raise cash for development and social expenditure.

The International Monetary Fund (IMF) told the Business Daily in an interview that the changes in the law had put Kenya in line with other modern VAT regimes in the world by simplifying the way it operates while reducing the number of exempt items, which had made it difficult for the taxman to implement.

Implementation of the new VAT law has resulted in price increases on a number of basic consumer items such as milk and medicines, causing public outcry and a call for its review by some consumer groups and politicians.

“It eliminates loopholes created by undue deductions, and it reduces the number of exempt items. Over the years powerful interest groups had managed to grant a zero rate to 400 different items. Caviar (a luxury delicacy which costs more than Sh200,000 a kilo) was zero rated,” said Domenico Fanizza, an assistant director at the IMF’s African Department.

The Treasury is faced with a Sh330 billion deficit in this year’s national budget of Sh1.6 trillion, which will be mainly financed by local and international debt.

The IMF argues that revenue collection has not kept pace with the rise in Kenya’s expenditure, hence the need for the new tax.

The Treasury expects to collect Sh10 billion more in the current fiscal year from the new VAT measures.

The Consumers Federation of Kenya (Cofek) has, however, strongly opposed the VAT increases, arguing that the Treasury and the Kenya Revenue Authority are unable to tame rogue traders who have taken advantage of the new law to increase prices of goods that are not affected by the changes while others have inflated their prices beyond the impact of the tax.

Cofek Thursday called for demonstrations outside the venue of a conference jointly organised by the IMF, Treasury and Central Bank in Nairobi next week.

“Even well-intentioned Treasury policies will fail as long as the Kenyan economy is controlled more by cartels than the government. Passing the buck by blaming the likes of the Competition Authority is wishful thinking,” said Cofek in a statement.

The rise in milk prices has particularly hit households hard, as the cost of a half-litre packet went up by Sh10 to Sh55 each.

The Kenya Dairy Board has petitioned the Treasury to exempt processed milk from taxation, arguing that it had led to a 25 per cent drop in consumption volumes.

“We wish to caution IMF not to provoke the Kenyan consumer further by hosting a meeting in Nairobi on September 17… with one of the undisclosed agenda as noting and celebrating the enactment of VAT Act 2013,” claimed the consumer rights body.

IMF contends that the law will affect households in the middle and upper income brackets, which are able to absorb the shock with the funds going to finance additional spending in favour of the poor.

“In Kenya the poor do not shop at big supermarkets that are located in fancy malls. Instead, they purchase their food in small shops and market stands that are well below the VAT turnover threshold,” said IMF.