Value Added Tax on petroleum products triggers an increase in tax for other essential products, but the government is broke and has limited options.
Although pressure mounted on President Uhuru Kenyatta to assent into law Finance Bill 2018, his Friday decision to return it to Parliament after slashing VAT to eight per cent was the best he could do.
While Kenya’s expenditure has been rising, revenue collection has dropped. Kenya Revenue Authority barely meets its targets amid significant drops in major tax brackets like income tax whose contribution shrunk to 42 per cent in 2017 down from 47 per cent the previous year.
In half year results where KRA missed its collection target by Sh68 billion, the taxman blamed the deficit on a drastic fall in customs duty after the government allowed the importation of duty-free sugar, maize and milk to cushion consumers against a sharp rise in inflation.
Although economies have an option to borrow both externally and internally to meet budgetary needs, debt is no longer an option for Kenya.
The country will spend in excess of Sh870 billion to service debt. This is half of the Sh1.74 trillion that the government expects to collect in ordinary revenue.
Kenya’s expenditure has grown at an alarming rate for the past five year, from Sh1.64 trillion in 2013/14 to Sh3 trillion this year.
Revenues grew by 13.3 per cent in nominal terms in 2016/17, but tax revenues expanded by less than nominal GDP 14.9 per cent, hence the tax-to-GDP ratio fell to 16.9 per cent of GDP— the lowest in a decade.
With huge budgets premised on his Big Four and unpredictable income, Uhuru is left with VAT as surest way to maximize on revenue collection.
Fuel cost is a key factor in determining final prices for most commodities. Tax on petroleum products whether at 16 or eight per cent will automatically trigger a price surge, hence higher tax margins for the government.
Kenya has no price control on most products, so consumers are likely to feel more heat as traders stretch prices uncontrollably.
I believe President Kenyatta understands all these negative effects perfectly well, but his adamancy on the VAT issue means his hands are tied.
Abraham Muriu, country manager International Budget Partnership spoke to The Star