After bread, Ruto now targets milk, unga and sanitary towels

Buckle up Wanjiku! The controversial Finance Bill 2024 is just a taste of the painful tax measures that will affect essential items including milk, unga, pesticides, fertilizers, pesticides and sanitary towels.

This follows Cabinet Secretary for National Treasury Njuguna Ndung’u proposal to restructure the value added tax (VAT) regime in a move that experts fear will hit items consumed by ordinary Kenyans the most.

In his Thursday budget, Prof Ndung’u proposed to subject the ‘exempt’ items to the standard 16 per cent VAT while ‘zero-rated’ items would be shifted to the exempt status, both of which would result in a price increase for a raft of essential items, mostly food.

The CS said the move is part of the International Monetary Fund-backed Medium Term Revenue Strategy, which details how the government seeks to increase revenue collection through a myriad of tax measures in the next three years.

Under the strategy, only the exported goods and services will be zero-rated, said Prof Ndung’u in a speech at the National Assembly.

He said the move was aimed at reducing the government’s tax expenditure, or the government’s estimated revenue forgone after giving tax concessions or preferences to a particular class of taxpayer or activity.

“Recognizing the importance of tax expenditure in the promotion of investment and addressing welfare challenges in the economy and in line with the Medium Term Revenue Strategy, I propose the rationalization of the VAT tax expenditures as provided in the VAT Act in form of exemptions and zero rating based on the following criteria,” said Njuguna in his budget speech on Thursday.

“One; that all finished goods currently exempt be subjected to VAT; two; zero rated finished goods and services be exempt from VAT; and, three; zero rating be restricted to goods and taxable services meant for export,” added Njuguna.

Ordinary bread is one of the items that has been removed from zero-rating status, and will now be subjected to the 16 percent VAT and increase the cost of a loaf by at least Sh10 should MPs back the proposal in the Finance Bill 2024.

Other products under the zero rated or exempt schedule will be reviewed at the start of the fiscal year beginning July 2025 under the three-year strategy.

Kenyans are yet to recover from an economic shock caused by one of the worst droughts in 40 years.

Salaries for permanent employees have not kept up with the increase in the cost of living for four consecutive years, pointing to the erosion of their purchasing power.

Many Kenyans have struggled to afford items such as bread, whose prices rose due to increase in prices of wheat due to the global supply constraints occasioned by the war in Ukraine.

But with the government’s intention to remove these items from the Zero rated schedule, more Kenyans will find it difficult to afford them.

For zero-rated goods, manufacturers are able to claim VAT refunds from the National Treasury rather than passing the tax expense to the final consumer.

“Mr Speaker, Kenya’s tax expenditure was estimated at Sh393.6 billion… for the year 2022. Of this amount, VAT tax expenditure amounted to Sh248.3 billion or 63.1 percent of the total estimate, a large erosion of the VAT tax base,” said Njuguna.

The CS added that tax expenditures create avenues for revenue leakage thus denying the government revenue to support key priorities that benefit the majority of the citizens.

Moving zero-rated goods to the exempt status will drive up the consumer prices of milk and cream, fertilizers and the raw materials used to manufacture these inputs, as well as pesticides and the raw materials used to manufacture them.

Maize flour, wheat flour and cassava flour are also zero-rated in the Value Added Tax 2013, which means that manufacturers can claim refunds on input tax instead of passing it on to the final consumers.

In a note, audit firm PWC warned that the decision to move most of the products listed in zero rated schedule to the exempt schedule will hurt consumers.

“The above measure will have the effect of increasing the cost of supplies since the exemption does not provide relief for input VAT incurred and the cost will be passed on to the final consumers,” said PWC.

While items under the exempt schedule do not attract the 16 percent VAT, the manufacturers cannot however claim the input tax on items used to produce the final item, forcing the suppliers to pass on the cost to the final consumer.

Taxing exempt status products will affect prices of items such as unprocessed milk, infant milk, milk powder, insulin, sanitary towel and food supplements.

Former Treasury CS Ukur Yatani had also proposed to introduce the 16 percent in the Financial Year ended July 2022, but it was dropped by the legislators following an outcry from Kenyans.

In his last interview, Yatani, retired President Uhuru Kenyatta’s last finance minister, rued the chance to reduce the country’s high tax expenditures blaming the legislators for some of the decisions they have made.

President Kenyatta’s successor has however vowed to reduce tax expenditure in a bid to increase tax collection as fraction of the gross domestic product (GDP) to 25 percent by 2027.

President Ruto had promised to have the VAT on bread scraped, but in his speech on Thursday, his Treasury CS remained mute on the head of state’s promise.

Treasury says tax expenditures are used instead of direct spending to deliver a Government subsidy to a class of taxpayers or encourage a desired activity.

They can take many forms, including tax exemptions; zero rating (Value Added Tax); tax deductions; tax offsets (or credits); and concessional tax rates.


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