MPs urged to rethink tax on bread, vehicles and financial services

ICPAK says some of the proposals in the Finance Bill have significant impact to public.

In Summary

•The government plans to utilise the Finance Bill to raise additional revenues to finance the Sh4.2tn 2024-2025 budget.

•The bill is targeted at raising an additional Sh302 billion.

MPs during a session in parliament.
MPs during a session in parliament.
Image: FILE

Members of Parliament have been urged to reconsider a number of proposed tax measures in the Finance Bill 2024, to save the public from higher costs of goods and services.

According to the Institute of Certified Public Accountants of Kenya (ICPAK), some of the proposals in the bill have “significant ramification” to the public.

The accountants’ body has raised concerns over the country’s Policy Framework, pointing out inconsistency between the proposals in the Finance Bill, 2024 and the National Tax Policy and the Medium-Term Revenue Strategy Provisions, that enable predictability and stability in tax laws.

For instance, the tax policy anticipated an environment where tax laws will be introduced to last for five years, yet some of the provisions introduced and passed in the Finance Act, 2023 are already being amended, ICPAK has noted.

“These frequent changes go against the canon of stability and predictability in taxation. Further, the Medium-Term Revenue Strategy provided that a policy direction that anticipated a percentage reduction of the VAT rate,” ICPAK chairman Philip Kakai said in a statement on Monday.

ICPAK has also urged MPs to reconsider the proposal to reclassify VAT on Bread.

The Finance Bill 2024 proposes to reclassify the supply of ordinary bread from zero-rated to standard-rated, which accountants now say will increase the price of the product which is a staple food for most Kenyans.

Globally, the demand for baked products has been on the rise and is expected to further grow by 13 per cent by 2025 for a variety of bakes.

In the African market, it is expected to grow by 6.9 per cent, according to ICPAK, and 6.7 per cent in the Kenyan market for the next 20 years. However, this could change with the new tax.

This development comes at a time when prices of wheat have been increasing thus hitting household disposable budgets harder.

“The Institute is of considered opinion that government should retain bread and other related wheat products as zero-rated to make them affordable to the majority of Kenyans who are still grappling with the high cost of living,” Kakai said.

The proposed motor-vehicle tax should also be reconsidered, ICPAK said, in the wake of a drop in the production of motor vehicles and multiple taxes and levies on fuel products.

The draft Finance Bill proposes to introduce a motor vehicle tax of 2.5 per cent of the value of the motor vehicle, to be collected by insurer at the point of issuing motor vehicle insurance.

The proposed tax amount shall be a minimum of Sh5,000 and a maximum of Sh 100,000.

The value will be determined based on factors such as make, model, engine capacity (in cubic centimetres), and year of manufacture, subject to the Commissioner’s prescribed guidelines on the valuation of the motor vehicle.

This tax should be remitted to KRA within five working days.

The applicable penalty for failure to account for motor vehicle tax due will give rise to a penalty of 50 per cent of the tax due.

This comes against the backdrop of revised insurance premium rates and high fuel prices, inevitably shoring up the cost of operating motor vehicles in Kenya, ICPAK noted.

The move, it said, will hurt the transport and logistics industry and may opt to pass through the additional cost to their customers, thus escalating the cost of living through a multiplier effect not only to insurance companies, spare-part dealers, car-service dealers, local assemblers, importers but also to the common wananchi who use motor vehicles.

“It is also important to note that the motor vehicle tax, unlike advance tax on commercial vehicles, cannot be offset against income tax payable,” Kakai noted.

The bill, tabled in Parliament on May 9, also proposes to increase in excise duty from 15 per cent to 20 per cent on telephone and internet data services, fees charged for money transfer services by banks, money transfer agencies and other financial services and fees charged for transfer services by cellular phone.

These include issuance of credit and debit cards, telegraphic money transfer services, foreign exchange transactions, including the supply of foreign drafts and international money orders.

Also to be affected is cheque handling, processing, clearing and settlement, including special clearance or cancellation or cancellation of cheques, issuance of securities for money, including bills of exchange, promissory notes, money and postal orders.

These may lead to a decrease in the number of transactions and thus may see a decrease in the excise duty collection, ICPAK warned.

The government plans to utilise the Finance Bill to raise additional revenues to finance the Sh4.2 trillion 2024-2025 budget, with the bill targeted at raising an additional Sh302billion.

Total revenue is targeted to increase by 16.2 per cent to Sh3.4 trillion in the financial year 2024-25, up from Sh2.9 trillion in the current financial year ending June 30.

The ambitious plan comes even as the performance of tax revenue collection remains below the set targets, largely on account of unfavorable business environment.

According to the end of March 2024 Exchequer Issues, Kenya Revenue Authority had only managed to collect Sh1.5 trillion in tax revenue, which is 82 per cent of the prorated Sh1.9 trillion, and 61.5 per cent of the financial year 2023-24 estimates of Sh2.5 trillion.

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