Prepare for pain as Henry Rotich reads new Budget

National Treasury Cabinet Secretary Henry Rotich reads the 2017-2018 Budget speech at Parliament Buildings in Nairobi on March 30, 2017. PHOTO | FILE | NATION MEDIA GROUP 

In Summary

• A raft of basic commodities are being moved from VAT zero-rated to exempt status, effectively increasing the cost of items.
• This means the cost will be passed on to consumers. In this category will fall basic items like flour, bread, milk, farm pesticides and cooking gas.
• Others include vaccines for humans and animals, raw materials for pharmaceutical manufacturers and supplies to marine fisheries and fish processors.

By CHARLES MWANIKI
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Shortly before 3pm on Thursday, Treasury Cabinet Secretary Henry Rotich will leave his 14th floor office at
the Treasury, take a reserved lift together with a retinue of aides for the short walk to Parliament buildings. There he will pose for the media and display the briefcase that contains his proposals to fund the ambitious Sh3 trillion budget for 2018/9 fiscal year.

That is as far as the niceties will go, at least for consumers and high income earners who are expected to shoulder the heaviest burden of a programme aimed at accelerating economic growth after the election-induced stagnation of last year.

The CS has largely played his hand on the VAT law through the Tax Laws (Amendment) Bill, 2018, that is before Parliament, and on income tax regime through the draft Income Tax Bill that could be tabled in Parliament together with the Finance Bill today.

COMMON GROUND

This, experts say, does not foreclose surprises on the excise tax front, perhaps the reason why Keroche Breweries and East Africa Breweries found rare common ground in urging restraint on taxation of alcoholic drinks.

The proposed changes to the VAT law are going to hit consumers the hardest. A raft of basic commodities are being moved from VAT zero-rated to exempt status, effectively increasing the cost of items because manufacturers cannot recoup the consumption tax paid on raw materials. This means the cost will be passed on to consumers. In this category will fall basic items like flour, bread, milk, farm pesticides and cooking gas.

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Others include vaccines for humans and animals, raw materials for pharmaceutical manufacturers and supplies to marine fisheries and fish processors. Households, farms and patients will bear the pinch.

TAX REFORMS

Deloitte tax leader for East Africa Fred Omondi said Mr Rotich could even choose to immediately bring on board some of the VAT changes that have been in the pipeline for some time — such as the levy on petroleum products.

High income earners and small enterprises are also targeted in the tax reforms. Mr Rotich has proposed a top tax rate of 35 per cent on all income above Sh9 million per year, or Sh750,000 per month.

Small businesses will be charged a presumptive tax of 15 per cent of the single business permit fee issued by a county government, replacing the turnover tax of three per cent that was charged on revenue below Sh5 million.

Experts say Mr Rotich can spring a surprise on Kenyans today, most likely by adjusting excise tax for inflation as allowed by the law. Although the excise (sin) tax has traditionally hit consumers of alcoholic beverages and smokers, the government has been making efforts to bring products like soft drinks, cosmetics, juice and bottled water under its net.

PUBLIC DEBT

The gazette notice that introduced the duty on these products was quashed by the High Court in March, but the government later appealed the decision.

Mr Rotich presents the budget before Parliament today, showing an increase in expenditure from last year’s Sh2.62 trillion amid concerns that the rising budget deficit is pushing the country’s public debt to an unsustainable level.

“The CS is unlikely to deviate much from the proposals he has already laid out in the Tax Amendment Bill and the draft Income Tax Bill, but he has the opportunity to adjust excise for inflation this year,” said PricewaterhouseCoopers (PwC) partner and head of tax in Kenya and East markets Stephen Okello.

Mr Okello said that instead of raising income tax rates, the Treasury ought to instead raise the VAT rate to 18 per cent while reducing income tax, which would leave more money in people’s pockets and boost the economy though increased spending.

FINISHED PRODUCTS

One way Mr Rotich can address the budget deficit without raiding the pockets of workers is by bringing more people under the tax net and focusing more on consumption taxes.

Mr Okello said the slashing of the budget allocated to KRA by Sh828 million could undermine administrative reforms that would help achieve this.

Mr Omondi said that import duty is another area that is likely to be targeted by Treasury for a tax increase.

“We are likely to see an increase of import duty on some finished products in the effort to promote local manufacturing which is one of the areas of focus for the government,” he said.

Pharmaceuticals have already warned that the cost of drugs will rise if the government implements a proposed import duty of 25 per cent on medicine.

That's bad news for household budgets, which have also been bit by a higher cost of energy and transport due to the rise in price of oil.