Tough choices ahead for businesses, buyers in the face of new

A woman at a supermarket in Nyeri County following introduction of VAT on commodities that were previously zero rated. FILE 

By CANUTE WASWA

In Summary

• When a government raises taxes, it opens a Pandora’s Box that cannot end well for traders or consumers

It started with the increase in prices as traders came to terms with the Value Added Tax (VAT) Act, 2013 that imposed tax on goods that had previously been zero-rated.

The new 16 per cent charge to goods prices by traders and manufacturers caught most people unawares. They had not anticipated having to dig deeper into their pockets to afford basic commodities like books, processed milk, mobile phones, electricity and even the day’s newspaper.

But it was not only that. Traders also took advantage to increase prices of goods that were not within the stipulated tax bracket. What we expect now is a spike in inflation.

Welcome to the law of unintended consequences. It refers to how economic decisions may have effects that are unexpected. But to understand the practicality of this, let us look at how a business works.

Typically, a business starts when someone sees an opportunity to make money doing something they are skilled at. They take a risk, invest their hard-earned money, and work diligently to make it successful. In turn, and quite rightly, they expect a return on their investment.

Successful companies generate more revenue than they spend. They understand that in order to justify their investment of time and money, costs must be less than revenue.

Maintaining the appropriate balance between the two is the constant preoccupation of nearly every successful business owner.

When a government raises taxes, it opens a Pandora’s Box that cannot end well for either the business or the end consumer. Like the ripples that a pebble makes when dropped in a pond, the knock-on effect of such increases are felt across the country in innumerable ways.

Business leaders in a situation such as ours need to become better at getting more done with less.

Leaders’ reaction

Most need to adapt more quickly and aggressively if they want to survive. But as most doctors will tell you, stemming the bleeding by itself won’t usually save the life. That means that technocrats in government need to start acting like entrepreneurs.

But despite all the new literature out there, you and I know that most still don’t understand how to do that. They continue to get caught up by the law of unintended consequences, creating perverse effects contrary to what they expected.

Faced with such an increase in business costs, businesses can choose to either pass the increase to consumers through higher prices or absorb the increase as a cost of doing business. However, each carries its own consequence.

If they raise prices, they risk losing sales because prices get too expensive. (Milk retailers are already complaining that their sales have dropped by 20per cent).

If they absorb the costs, they risk incurring a loss or reducing their profit to a level that does not justify their continued investment of time and money.