No relief for consumers as changes to Value Added Tax take effect

Kenyans have barely found relief in the cost of basic commodities as changes to the Value Added Tax (VAT) charge were effected in line with March 25 Presidential directive kick in.

This is as the majority of essential goods including food commodities fall outside the scope of the tax charge as either VAT exempt commodities or zero-rated commodities.

Goods such as maize flour, tomatoes, cereal grains and vegetables are for instance exempt from VAT charges in accordance to the VAT Act while essentials such as agricultural pest control products are zero-rated.

According to data from the Kenya National Bureau of Statistics (KNBS), the VAT exempt commodities account for the majority of consumer spending with a weighting of 32.9 per cent ahead of costs to electricity, housing, transport and accommodation services.

As such, PKF Patner Michael Mburugu argues the case for intangible yields from the reduction in the VAT charge with the majority of Kenyans staying off the levy.

“The change in the VAT charge is more of a cosmetic adjustment as we see no real benefit to Kenyans. Over three-quarters of the public do not procure essential goods from mainstream sources and as such, the issue of VAT does not arise,” he said.

“Further, the relief on vatable goods only result in a marginal reduction on an individual basis.”

The reduction in the VAT charge to 14 per cent from 16 per cent translates to a 12.5 per cent relief to the tax rate charged on final goods but the final consumer costs have fallen by a lesser 1.7 per cent per item.

Economist Ramogi Odhiambo terms the results of the VAT adjustment as a loss-loss situation for the exchequer as the review trims government revenues without necessarily impacting consumer costs.

“Fiscal solutions are never effective. What you would expect to see is a stimulus package which would in turn create a multiplier effect of money in circulation to enable the continuation of both production and tax payments,” he said.

The adjustment of VAT comes ahead of next week’s National Assembly debate on other Covid-19 related economic interventions including the proposed waiver of taxes for earners below Ksh.24,000 per month and the slash on corporation tax from 30 to 25 per cent.

On Tuesday, the National Assembly published the proposed amendments as part of the 2020, Tax Laws (Amendment) Bill which is now the subject of public participation.