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September 20, 2018

Think the cost of living is high? Wait till new taxes take effect

Pump prices displayed at a shell petrol station in Westlands, August 27, 2018. /EZEKIEL AMING'A
Pump prices displayed at a shell petrol station in Westlands, August 27, 2018. /EZEKIEL AMING'A

Life is about to get a lot harder for Kenyans following the introduction of 16 per cent VAT on fuel and food items, such as wheat flour, maize flour and bread, from Saturday.

PSVs and businesses have shifted the entire tax burden to consumers. Manufactures announced more than Sh10 increase in product prices, while matatus will raise fares by between Sh10 and Sh50.

The tax charge, tabled in the Finance Bill 2018, stems from an agreement the government made with the International Monetary Fund three years ago. It is estimated to earn Treasury an additional Sh71 billion per year.

While it is good for the coffers, it deals another blow to the pockets of Kenyans, who are still reeling from new electricity tariffs from August 1. These increased power costs for the middle class by up to 54 per cent and for manufacturers by 36 per cent.

Moreover, the government increased Road Maintenance Levy in 2016 from Sh6 to Sh18, while world fuel prices are on the rise since 2015, from Sh5,036 ($50) a barrel to the current Sh6,849 ($68) per barrel.

The end-result is a rising cost of living and doing business that is a bitter pill to swallow for most Kenyans.

G4S security guard John Panyako, who lives in Rongai, receives a gross salary of Sh26,000, spends Sh3,500 on rent, Sh8,000 on household shopping, Sh300 on water and Sh480 on electricity bill per month. He also pays a loan of Sh7,000 and ends up with approximately Sh5,300 as spare cash.

"Sometimes, I commute to Karen and end up using Sh600 per week on transport. The amount is too high for me," Panyako said.

Panyako said the government should consider more helpful initiatives to improve Kenyans’ lives, instead of hiking prices. He cited the 6kg LPG gas cylinders issued by the government in October last year under the Mwananchi Gas project, of which he was a beneficiary.

"The government should subsidise essential items like maize flour, like it did with the gas," Panyako added.

He said it should also consider reducing rent and follow up on income-increasing directives, as most employers do not implement the policy.

"I have never noticed a change in my income any time the government said salaries have increased. If at all prices are raised, then incomes should also rise," Panyako said.

EATING INTO PROFITS

Currently, the price per litre of petrol is Sh108.90 in Mombasa, Sh113 in Nairobi, Sh114 in Kisumu and Sh127.50 in Mandera. As from September, the price in Mombasa will be Sh128.06, in Kisumu Sh132.36 and Bomet Sh134.91 per litre.

Charles Mwangi, director of Peakplast Limited in Industrial Area, foresees tough times ahead. He supplies imported consumables, products and jewellery around Nairobi and other towns.

Mwangi owns three vehicles for supplies, which use Sh60,000 worth of fuel per month when distributing in Nairobi and over Sh100,000 when supplying in other towns.

/ENOS TECHE

He plans to begin manufacturing his goods in the country but is wary of the costs. “The increase in fuel prices caught me by shock, and I am worried it will eat up my profits. I am thinking of how I will restructure my operations once I begin manufacturing,” Mwangi said.

Manufacturers are also worried about this increment, as it comes immediately after power tariff reviews. Kenya Association of Manufactures head of policy, research and advocacy Job Wanjohi said the effect will be unfortunate for Kenyans, as they will feel the heat from increased transport fare, power bills and paraffin costs.

"Consumer prices will increase by between 1 per cent and 16 per cent if the value chain from industrial input suppliers and manufacturers is not able to absorb the extra cost," Wanjohi said.

He said the increase in diesel from Sh102 to Sh120 per litre will increase cost of production and reduce competitiveness, as it is used in logistics to transport labour, raw materials and finished products.

"The 16 per cent VAT on fuel will additionally increase cost of power, as Power Bill carries fuel cost levy as a result of part thermal production, which will be slammed with the VAT. Further, due to unstable, unreliable power supply, manufacturers depend on generators during downtime," Wanjohi said.

COMPETITIVE DISADVANTAGE

KAM has also said the effect will reduce their attempts to penetrate into Continental Free Trade Area, which accounts for 83 per cent imports from non-African countries.

Wanjohi said Kenya’s SMEs and large firms manufactured goods are already suffering from a 15 per cent cost disadvantage in global markets due to other levies, such as Import Declaration Fee and Railway Development Levy, as well as logistics and transport costs, such as delayed loading and offloading at the port.

"Kenya is currently competing largely with non-East Africa Community goods, which continue to entrench further into the EAC market at our expense. Most of these exported goods are price-sensitive, and this is going to affect us immensely," he said.

Wanjohi called on Treasury to suspend the implementation and let fuel continue enjoying exempt status and cushion Kenyans from further fuel price increase.

"The government should relook into more effective anti-corruption measures to shield the public from the annual loss of public funds. The consistent increase in prices is hurting Kenyans," he said.

He added that there is enough tax base to cater for security loans through IMF.

"The government needs to improve the debt-to-GDP ratio from the current 59 per cent to about 40 per cent, so that conditional loans do not call for imposition of additional tax burden on Kenyans," Wanjohi said.

/ENOS TECHE

Matatu association chairman Simon Kimutai said the 16 per cent tax rise is quite high.

"It is prudent to transfer the costs to customers and increase the fare charges once this tax is placed. However, we are going to be fair in the pricing," he said.

Kimutai said the fares are set to increase depending on distance covered. For places that charge Sh30, the fare will rise to Sh40. "Until the government checks on the fuel prices for adjustments, the set prices will remain," he said.

DRINKS HIT, TOO

The Finance Bill 2018 also proposed an excise duty on beer, soft drinks and cigarettes, subject to the inflation rate every year.

Betty of Liqour Barrels, Westlands, said one of their main suppliers, East Africa Breweries Limited, has increased prices of most of their products by Sh50 to Sh70.

"We used to buy Kenya Cane 750 ml at Sh600 but now it is Sh650. Pupov Vodka 750 ml has also increased to Sh670 from Sh600. There has been no drastic change in sales on the brands, but I’m waiting to see with time," Betty said.

Monty’s store in Sarit Centre has also said that most of their wines suppliers and the Kenya Wine Agency Limited have alerted of price increase.

A shop attendant in Naivas supermarket along Kenyatta Avenue said the prices of 1.25 litres Coca-Cola soda will rise from Sh99 to Sh110, while two-litre soda will increase from Sh150 to Sh160.

"We are actually clearing the stock now, but prices are going to increase very soon. We are about to change our price tags," the shop attendant said.

A promoter with Bia Tosha distributors said the prices of newly launched Danish beer, Tuborg, has increased from Sh3,410 for 24 pieces to Sh3,626.

In a CBK market perceptions survey for July, the report showed an expected moderate increase in inflation. This will largely be driven by some of the tax measures and temporary supply shocks emanating from the crackdown on contraband goods, including sugar.

Other factors include the logging ban’s effect on charcoal prices and the rise in international oil prices and consequent upward pressure on domestic fuel prices.

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