As the Ruto government appears to capitulate to ten-year-old pressure from the International Monetary Fund to abandon broad reliefs on consumption, the cost of necessary products and services is expected to rise in a proposed reform of taxes legislation.
Njuguna Ndung’u, the Treasury Secretary, has revealed a plan to end the zero-rating of value-added tax on the sale of a number of items, including maize flour, cooking gas, regular bread, medications, agricultural pest management products, and animal feeds.
Additionally, the proposed revision will increase the price of necessities like locally made mobile phones, motorbikes, electric bicycles, solar batteries, and electric buses, all of which currently are VAT zero rated.
According to the draft Medium Term Revenue Strategy, which will take effect in July 2024, zero-rating for VAT purposes would only be allowed for exports of goods and services, while raw goods will be exempt.
The full implementation of the IMF-backed revisions that revamped the VAT Act in 2023 will coincide with the introduction of the extensive modifications to consumption tax regulations.
Since around ten years ago, the IMF has pushed for changes that would tax all items, including social security programs to help the most disadvantaged households.
One of those improvements involves tripling the VAT on fuel to 16% in July following numerous prior failed attempts.
“First Schedule (exemption) and Second Schedule (zero-rating) to the VAT Act will be reviewed to rationalize the exempt and zero-rated supplies and align the VAT system to the destination principle as well as other international best practices,” Prof Ndung’u wrote in the draft revenue strategy.
“The review shall limit zero rating to exports and remove all VAT exemptions except for unprocessed goods.”
As part of it’s campaign platform, the Ruto government promised to “develop an appropriate strategy to address the tax burden on essential goods and services.”
The Treasury contends that over time, the VAT tax system’s zero-rating and exemption policies have reduced government revenue, with revenues falling short of potential by about 40%.
According to an estimate made by the Treasury last year, tax breaks on domestic VAT, which are paid by businesses with annual sales of more than KSh5 million, will decline from KSh234.38 billion in 2020 to KSh211.94 billion in 2021.
However, of the KSh259.51 billion in revenue that the Kenya Revenue Authority forewent in 2021, domestic VAT accounted for 82.29% of that amount.