On the VAT Act 2013

Posted by on 11th September 2013

Categories:   Uncategorized

Last month the Cabinet Secretary for the National Treasury, Henry Rotich, stated that there was no cause for alarm over the new Value Added Tax (VAT) Bill. The Cabinet Sectary also stated that the new bill would only revise the list of goods exempted from tax, and was not intended to hurt mwananchi, similar assurances were given by the Deputy President. However it is clear since the Act became operational on 2nd September, that this is not the case.

The VAT Act imposed a 16 percent tax on essential goods and services that had been zero-rated. Under the Act previously zero-rated goods which became taxable at 16 per cent include milk, maize and wheat flour, bread, sanitary towels, medical dressing and plasters. Some of the zero rated services that became taxable at 16 percent are electricity and water.

Proponents of the new VAT Act argue that it will increase the government’s revenue, in his budget speech the Cabinet Secretary for the National Treasury stated that VAT reforms including revision of the list of VAT exempt goods would afford the National Government Sh10 billion more monthly. Kenya Revenue Authority (KRA) has also argued that the new VAT bill will increase tax compliance, the logic being because everyone is taxed at every transaction VAT is able to capture more revenue and also revenue that had previously been missed.

While the VAT may increase government revenue, something that still needs to seen, it does so by reducing the number of goods and services of both the exempt and zero-rated items. The thing is a number of these goods and services are essential milk, water, bread, maize flour, medical dressing, transport, while 16 per cent may not seem like it puts several of these essential goods and services out of the reach of many Kenyans.

In addition VAT on previously zero rated items will negatively affect poor Kenyans. Yes everyone will be charged 16 percent VAT on every transaction; however this tax has more of a negative effect on someone earning 30,000 shillings a month, than someone earning 1 million shillings a month.

So while there is no question that the government does need to increase its revenue. Is the VAT Act the best way to do considering regressive disproportionately affects the poor? And what happened to the promise that the VAT Act would not hurt mwananchi?