Treasury Principal Secretary Kamau Thugge. FILE PHOTO | NMG
Summary
- Decision that goes against expert advice saves taxpayers extra costs
- It has spared consumers an increase in the cost of commodities such as electricity, milk, newspapers, textbooks, fertilisers, alcohol, cigarettes, mobile phone handsets and airtime.
- Kenya, however, plans to impose VAT on previously tax-exempt products such as petroleum, which will start attracting a 16 per cent tax from September
Kenya will not raise its value added tax (VAT) to match the
uniform rate for the rest of the countries in the East African Community
(EAC), the Treasury has said, offering relief to households and
businesses.
Treasury Principal Secretary Kamau Thugge
on Tuesday said Kenya’s VAT on consumer goods would remain at 16 per
cent despite calls to align the rate with the rest of the trading bloc’s
members such as Tanzania and Uganda, which charge 18 per cent.
There
has been growing concern that different rates at which member countries
levy domestic taxes is distorting the EAC common market.
The
Treasury’s decision to retain the current VAT rate has spared consumers
an increase in the cost of commodities such as electricity, milk,
newspapers, textbooks, fertilisers, alcohol, cigarettes, mobile phone
handsets and airtime.
Global institutions, including the Washington-based Institute of
International Finance (IIF) had tipped the Treasury to raise VAT to 18
per cent as a way of boosting revenues and arrest fiscal deficits that
have seen the State take on huge loans.
Narrowing deficits
The
institute reckons that the increase would be in line with the
Treasury’s quest to honour its commitment to the International Monetary
Fund (IMF) in narrowing deficits.
Kenya pledged to
slash budget deficits through spending cutbacks and raise tax receipts
in exchange for a six-month extension of a Sh150 billion ($1.5 billion)
stand-by credit facility from the IMF that was due to expire last month.
“Improving
the VAT’s collection to five per cent of GDP (gross domestic product)
can further cut the deficit by 0.6 per cent of the GDP,” the institute
said in its report on Kenya.
“Furthermore, the VAT rate
could also be raised from the current 16 per cent to 18 per cent,
similar to the rates in Uganda and Tanzania.”
The IIF,
which is a global association of the financial industry, also advocates a
freeze in growth of public wages and salaries as yet another measure to
lower budget deficits.
Borrowing spree
Budget
holes have recently seen the Treasury embark on a borrowing spree,
piling on debt stocks, triggering warnings from the IMF.
“The
fiscal deficit in 2016/17 widened to 9.2 per cent of GDP (including
grants) due to one-off effects and low revenue collection.
"Fiscal
spending increased due to drought relief efforts and recent
presidential elections. The two-stage elections cost a record $532
million (Sh53.2 billion), equivalent to 0.7 per cent of GDP,” the report
says.
“Under the extended IMF stand-by arrangement
programme, the authorities committed themselves to reducing the fiscal
deficit to 7.2 per cent of the GDP in 2017/18, and to 5.7 per cent of
GDP in 2018/19.”
The precautionary funds are meant to offer the economy a foreign exchange buffer against unforeseen external shocks.
Kenya,
however, plans to impose VAT on previously tax-exempt products such as
petroleum, which will start attracting a 16 per cent tax from September
in efforts to boost tax receipts and reduce budget shortfalls.
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