Kitui Central MP Makali Mulu has raised concerns over proposed changes to Kenya’s VAT regime, warning that the move could inadvertently hurt the country’s manufacturing sector instead of promoting economic growth.
While speaking in Parliament, the legislator acknowledged that the proposed shift of certain goods from the zero-rated category to VAT-exempt status might be aimed at curbing abuse of VAT claims.
However, he cautioned that the unintended consequence could be higher production costs that would be passed on to consumers.
“While it could be the move in the right direction, you can imagine if we move goods from zero-rated to VAT-exempt, then what it normally means is those goods will not be able to claim the input VAT,” Makali said.
“The question is, because when it is zero-rated, you will not charge VAT but will also claim VAT on inputs, in that case, you can make the price of the goods absurdly cheaper because you will be claiming the input VAT,” he added.
He questioned whether manufacturers would absorb the additional costs or transfer them to consumers.
“Now, if you do not claim the input VAT, are the manufacturers going to take that as part of their cost, or are they going to transfer that to the consumer by increasing the prices. Now, if they transfer that to the consumers by increasing prices, that is where the danger could b,e depending on the magnitude,” he said.
Makali also pointed to what he described as systemic abuse of VAT refund claims, arguing that some companies are making more money from tax refunds than from actual production.
“You know what is happening, and I think it is good if we call a spade a spade. What is happening is that some of the people producing these goods, what they have done instead of producing more, have invested in very good accountants who can just sit, do the right VAT claims, and you will make more money by claiming for reimbursements than by producing,” he noted.
He emphasised that the move by the CS for Finance John Mbadi, seemed more focused on preventing abuse rather than on production and economic expansion.
“But you know what he is trying to do now is, because since you are claiming VAT above what is expected by playing around with your books, I will make sure that you don’t claim at all. But then you look at it from the other side, the other side is you are likely to make manufacturers not produce more,” Makali said.
