Skip to main content
December 11, 2018

ALY KHAN SATCHU : VAT Tax and Spend

The new fuel prices at a petrol station after reduction. Photo/Monicah Mwangi
The new fuel prices at a petrol station after reduction. Photo/Monicah Mwangi

A value-added tax (VAT) is a consumption tax. Value-added taxation is based on a taxpayer's consumption rather than his income. Advocates say it raises government revenues without punishing success or wealth, as income taxes do; it is also simpler and more standardized than a traditional sales tax, and there are fewer compliance issues. It is believed that VAT's impact would be felt less by the wealthy and shouldered more heavily by the poor, who spend a larger percentage of their take-home pay on necessities. Notwithstanding the above, it is a ''democratic'' Tax in that Folks are not able to game the System [This is an important consideration especially when you consider the level of racketeering in our Economy around the importation of basic commodities - Sugar is a case in point] and this is one of the reasons the likes of the IMF have been keen that the GOK introduces it.

There has been a great deal of drama around the introduction of the 16% VAT Levy on Fuel which was introduced on September 1st. MPs fought its introduction after a ''Clouseau'' like fashion. The fuel tax came into effect after MPs failed to factor in enough time to vote on extending an existing exemption from the levy until 2020 and have it included in proposed legislation known as the Finance Bill which is why I characterised it as a ''Clouseau'' like effort. The tax was first legislated in 2013, but its introduction was postponed until 2016 and then again delayed until this year. President Kenyatta was out of town. And Fuel stations went dry and queues snaked out of Stations into the main road and counterintuitively if you were to get home last week at a reasonable hour, you had to avoid roads with Fuel stations.

Bloomberg's Adelaide Changole estimated that the new Tax would raise 71 billion shillings ($705 million) a year.

“The president has a difficult decision because the Big Four agenda, which is his agenda, needs to be funded from somewhere,” said Jibran Qureishi, regional economist for Stanbic Holdings Ltd. in Nairobi. If there’s no solution, “it will be shelved and pushed forward, which means no Big Four and no legacy.”

I am not certain that VAT will prove the Silver Bullet that will finance the Big 4 because I am of the view that the GOK credit card is now maxed out and that the introduction of VAT is actually a neccessary defensive manoeuvre. Revenue collection is behind the curve, with GOK collecting 99 billion shillings in July, but spending 121 billion for recurrent expenditure and debt payments. You don't have to be a Rocket Scientist to work out that if this continues at this pace it would mean 1.2 trillion shillings in revenue -- a shortfall of 600b. Do the Math!

The Reality is that the Government of Kenya is simply in no position to forgo that VAT. If Kenyatta does as lawmakers wish by exempting fuel from tax and retaining the rate cap, it would be seen as “a complete failure by the presidency,” according to Jacques Nel, an economist at South Africa-based NKC African Economics. The potential loss of the IMF facility has made investors jittery and forswearing the extra revenue would be a further knock for the nation’s finances, he said. [Bloomberg]

The Bigger challenge is this. Clearly the VAT imposition is going to ripple through the economy, dial up inflation and dial down consumer spending power. GDP growth is surely going to lose momentum and given the reaction we have witnessed, its becoming increasingly clear we are testing the limits of the ''Laffer Curve''

The Laffer Curve suggests that, as taxes increase from low levels, tax revenue collected by the government also increases. It also shows that tax rates increasing after a certain point (T* on the diagram below) would cause people not to work as hard or not at all, thereby reducing tax revenue. Eventually, if tax rates reached 100 percent, shown as the far right on his curve, all people would choose not to work because everything they earned would go to the government.

Denis Healey the British Chancellor of yore famously announced ''I want to squeeze the rich until the pips squeak.” Remove the word ''rich'' insert the word. ''Kenyans'' and what we witnessed were Kenyans ''squeaking'' That loops me back to the following issue, at some ''Tax and Spend'' runs out of road. Therefore, we really need some refreshed and innovative thinking. I and many others were for example very alarmed at the ''Robin Hood'' Tax. Let me tell you why. If you are dependent on funding your deficit via the wholesale capital markets, then you do not penalise Investors [by up to an addition 15 basis points - reference unto 3 movements] to buy GOK bonds for example. Thats the equivalent of pulling out a loaded Pistol and insisting on shooting yourself in the Foot. Not a good idea I am sure you will agree but that is what the Robin Hood Tax is.

We need to starting ''Think[ing] different'' to borrow the iconic Apple Advert from 1997 and fast but make no mistake a reversal of the VAT on Petroleum is simply not possible.

Poll of the day