Treasury has done a shoddy job of explaining rationale for new VAT

Kenya's Cabinet secretary for the National Treasury, Henry Rotich, at the Treasury Building in Nairobi on June 13, 2013 on his way to Parliament to present the 2013/2014 Budget. Photo/SALATON NJAU/FILE  Nation Media Group

In Summary

• Without a doubt, the consumer has been hit badly by an unprecedented upsurge in the prices of basic consumer goods following implementation of the new VAT regime.
• Newspaper prices have gone up ostensibly because of the 16 per cent VAT on newsprint. Yet when you calculate the price differential, you will find that prices have gone up by more than 16 per cent.
• The problem is that we look at the government as an inexhaustible source of largesse.

By Jaindi Kisero
More by this Author

Methinks the National Treasury has done a poor public relations job at leading the country in debating the vexed issue of the VAT Act.

The economic arguments for introducing VAT on goods and services, which were previously exempt, have not been articulated plainly.

The choices between not implementing the new VAT regime and introducing it have not been laid out starkly.

In the process, the government is losing the propaganda war. And, once a public policy issue has been reduced into a matter of scoring propaganda points between politicians and consumer lobby groups, discerning between populism and what makes economic sense for the country becomes difficult.

Without a doubt, the consumer has been hit badly by an unprecedented upsurge in the prices of basic consumer goods following implementation of the new VAT regime.

But where is the pressure on consumer prices coming from considering that we all know that most basic consumer goods were exempted from the new VAT regime?

Look at the list and you will wonder why prices of even goods listed as exempted from the new VAT regime have also gone up.

Is it failure by institutions dealing with consumer protection, restrictive practices by traders or monopolistic pricing?

Considering that sugar has always been subject to VAT at 16 per cent, why is the consumer paying more for the commodity?

Newspaper prices have gone up ostensibly because of the 16 per cent VAT on newsprint. Yet when you calculate the price differential, you will find that prices have gone up by more than 16 per cent.

Tuesday, a colleague in the office who rears layers defended the recent increase of consumer prices of eggs on introduction of 16 per VAT on chicken feed.

Then I asked him: “That extra 16 per cent you are now collecting from consumers, are you remitting it to the taxman? Are you a registered VAT collector?” He was unable to defend his decision to charge his customers more for eggs.

Indeed, in a liberalised environment like ours, nothing stops my colleague from charging more for his eggs. But he engages in dishonesty when he pretends that egg prices must go up on account of the new VAT regime.

I fully support the idea of protecting consumers from the recent increases in the prices of basic commodities. But if you diagnose the problem incorrectly, you will end up with the wrong prescription.

You don’t apply a palliative to treat a chronic malady. In our circumstances, abolishing the new VAT regime right now will not necessarily mean that consumer prices of basic commodities will come down.

I agree with the proposition that something ought to be done to protect consumers from unpredictable increases in consumer prices. But I am not convinced that VAT is the only factor. If I were the one making decisions, I would have VAT reduced to a level of even 10 per cent.

But I would make sure that all exemptions and zero rates are eliminated completely so that VAT becomes a truly broad-based consumption tax.

In this region, we were the first country to introduce VAT. It was supposed to be the pre-eminent tax — the tax for the future. VAT was supposed to deliver a wider tax-base and equitable taxation.

Did it happen? The answer is a big No. We ended up in a ghastly mess designed to create work for accountants and tax consultants.

The most obvious sign that the current system is dysfunctional is the back-log in VAT refunds.

The inordinate delays in processing VAT refunds were hurting the private sector badly, holding cash flows needed to fund operations and to sustain jobs.

The Kenya Association of Manufacturers made several representations to the government over the matter.

We were at a point where the government was spending 15 per cent of gross revenues on refunds.

What is the point of collecting a tax when you know that you have to refund 15 per cent of what you have collected at the end of the day? It beats all logic.

The problem is that we look at the government as an inexhaustible source of largesse.

We want laptops for Standard One children. We support initiatives like the Uwezo Fund where the youth can borrow cheaply.

We support higher salaries for teachers, MPs, judges, nurses and doctors.

We want to buy Prados for governors and expensively furnished offices for ministers.

We don’t ask: Where does all this money come from? Higher taxes, stupid.