VAT CUT OF LITTLE BENEFIT

Uhuru tax cuts unlikely to help the poor, consumers

KRA is the biggest loser, high-income earners the big winners

In Summary

• Benefits of tax cuts are likely to be outweighed by the effects of the coronavirus on supply chains, including higher costs of importing raw materials.

• "We don't have the ability to give tax cuts at this point. We already are running huge deficits And thus, any tax cuts just add to the deficit," James Muragof Institute of Public Finance said.

President Uhuru Kenyatta when he addressed the nation from State House on March 25, 2020.
President Uhuru Kenyatta when he addressed the nation from State House on March 25, 2020.
Image: PSCU

Consumers, especially the poor, are unlikely to benefit from VAT cuts to reduce the cost of goods.

President Uhuru Kenyatta announced the VAT cuts and other measures on Wednesday to cushion individuals businesses from the economic slowdown caused by the coronavirus.

The benefits of the tax cuts are likely to be outweighed by the effects of the coronavirus on supply chains, including higher costs of importing raw materials.

 
 
 
 
 
 

The deterioration of the shilling will not help consumers and those who need the most help.

.During his address on Wednesday, President Kenyatta directed the Treasury to go to Parliament seeking immediate relief and increasing Kenyans' disposable income.

He decreased VAT from the current 16 per cent to 14 per cent.

“The informal sector is unlikely to benefit as Vatable goods form a low part of their purchases and the increase in prices from supply shocks are far more likely to outstrip any tax cuts,” financial analyst Mihr Thakar told the Star on Thursday.

This will be the first time in seven years that Kenya will be reducing VAT after including more commodities under this tax category in 2013.

Exempt from VAT are milk, eggs, meat, rice, maize, bread, beans, unprocessed vegetables, tubers, infant food formula, fertiliser, sanitary towels and pharmaceuticals to name a few.

This means if an item or business is 'exempt', the government doesn't tax the sale but producers cannot claim a credit for the VAT they pay on inputs to produce it

 
 
 
 

Kenya Association of Manufacturers chief executive Phyllis Wakiaga concurred with Thakar, saying most manufacturers rely on imported raw materials for processing.

Covid-19,  with 31 confirmed cases so far, has forced manufacturers to seek alternative source markets such as Turkey, which are more expensive, deferring imported goods from China, where the global pandemic started.

Coronavirus has also caused the shilling to drop by more than six per cent against the dollar. The quoted at 106.20 on Thursday, hit a five-year low against the dollar on Tuesday at 107.20.

“The full effect [of the VAT cuts] can be undermined by the depreciation of the Kenyan shilling and increased costs due to disruption of value chains, owing to the fact that most of the raw materials for processing is imported,” Wakiaga said.

The cost of electricity, cooking gas, detergents, sanitisers and processed foods is, however, set to fall, reduce the burden on households facing lower incomes or coronavirus job losses.

Other goods that will attract lower VAT are newspapers, books, phones, electronics, computer hardware and software.

Kenyans should not expect an immediate drop in commodity prices, the Consumer Federation of Kenya (Cofek) told the Star.

The VAT cuts are effective on April 1., even as the National Treasury moves to reduce VAT from 16 per cent to 14 per cent.

“Kenyans should learn to manage their expectations. No amount of relief will be of immediate benefit to customers,” Cofek secretary general Stephen Mutoro said. 

Currently, a 2kg bag of maize flour is going for an average Sh125, while wheat is Sh166. Bread and milk are retailing at an average Sh50.

“What the President wants is to stabilise the economy and the supply chain, not to make commodities cheaper," Mutoro said.

A long-term relief of as long as 12 months is needed if Kenyans are to benefit from lower prices," he said.

INCOME TAX RELIEF

The President also declared 100  per cent tax cuts for workers earning Sh24,000 per month.

This means Sh1,415 payable as tax to the Kenya Revenue Authority as income tax will remain in workers' pockets to assist with cash flow in turbulent times.
flow the worker’s pocket to assist with cash flow during these tumultuous times.

This blanket directive fails, however,  to capture workers earning anything between Sh24,000 and Sh47,059. They fall under the 20 per cent and 25 per cent income tax brackets.

KRA’s tax calculator shows the directive will mostly benefit the country’s large income earner, who are only a handful.  

Data released by the Kenya National Bureau of Statistics last November show only 79,982 of 2.7 million people in the formal workforce earn more than Sh100,000.

However, 74.58 per cent of formal workers captured in the KRA database earn less than Sh50,000

The tax calculator shows employees earning a monthly salary of Sh50,000 will receive Sh1,457 relief under the proposed PAYE reduction from Sh7,332 to Sh5,875.

Those earning Sh100,000 will retain Sh3,957 that would have gone to KRA, with PAYE down to Sh18,375 from the current Sh22,332.

Workers earning a monthly gross salary of Sh250,000 will o keep Sh11,457, with PAYE down to Sh55,875 compared with Sh67,332 currently going to KRA.

Top earners with a salary of Sh500,000 per month will receive the biggest reprieve, retaining Sh23,957 after a drop of PAYE to Sh118,375 from the current Sh142,332.

Financial analyst Thakar told the Star that tax cuts for profitable entities and private individuals alike will result in a combination of two effects including an increase in deposits at banks for onward lending as well as a rise in disposable income.

Tax expert and Institute of Public Finance chief executive James Muraguri criticised the government for giving such tax breaks to people whom he said were unlikely to spend during this period.

"The government should have focused more on keeping small businesses afloat," he said. 

REVENUE LOSS 

The KRA  is the biggest loser in the President's new tax measures meant to ease pressure on households and businesses.

This is likely to push up the country’s budget deficit, derailing development projects, hurting recurrent expenditure and repayment of debts.

The taxman, for instance, is expected to lose a substantial amount of Pay as You Earn (PAYE) after the President announced  100 per cent relief for those earning a gross salary of less than Sh24,000 and five per cent cut for those earning above that amount. Last year, KRA collected Sh380 billion from PAYE.

The President's VAT tax cut to 14 per cent from 16 per cent, among other measures that are likely to deny the taxman almost Sh80 billion, far less than its target of Sh1.6 trillion.

The Treasury expects revenues to drop by Sh70 billion in three months to the end of this t financial year.

The authority missed its half-year target for FY 2019-20 financial year by Sh88.3 billion, netting Sh857.8 billion over the period.

This includes tax incomes of Sh779.3 billion, 45.7 per cent of the Sh1.7 trillion revised target for the current financial year, meaning the taxman is lagging far behind his target.

Muraguri said due to the problems caused by "reckless" fiscal policies over the years, the government shouldn't give such tax breaks. 

"We don't have the ability to give tax cuts at this point. We already are running huge deficits And thus, any tax cuts just add to the deficit," he said.

The Treasury is yet to submit its proposal on the proposed relief measures to the National Assembly for deliberation before the directives can be implemented.


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