Budget gives poor families relief with one hand but takes it with the other

National Assembly Budget and Appropriations Committee chairman Mutava Musyimi (left), National Treasury Cabinet Secretary Henry Rotich, his Devolution and Planning counterpart Mwangi Kiunjuri and National Treasury Principal Secretary Kamau Thuge at Parliament buildings before reading of the budget presentation for financial year 2016/17 on June 8, 2016. PHOTO | JEFF ANGOTE | NATION MEDIA GROUP

What you need to know:

  • The poor will first be hardest with changes in the fuel economy with the price of kerosene set to rise by at least Sh6 per litre after the re-introduction of exercise duty on kerosene.
  • Although the cost of kerosene has gone up, Mr Rotich also proposed to reduce the prices of stoves by lowering import duty on the products from 25 to 10 per cent.
  • The poor will also share the burden of the increased Road Maintenance Levy which has now been increased from Sh12 per litre to Sh18 per litre of petrol and diesel.
  • The middle and upper class will now have to dig deeper into their pockets to import vehicles worth over Sh1 million.

The Treasury on Wednesday hit the poor hard as it outlined its tax plans to finance its Sh2.3 trillion Budget for the next financial year.

Treasury Cabinet Secretary Henry Rotich used a double-edged sword against low-income earners who will now bear the brunt of increased tax on fuel, which is also likely to lead to steeper commodity prices and higher transports costs.

The poor will first be hardest with changes in the fuel economy with the price of kerosene set to rise by at least Sh6 per litre after the re-introduction of exercise duty on kerosene. The move was primarily meant to deter oil marketers from adulterating petrol and diesel using kerosene.

“The earlier removal of the tax has since resulted in increased adulteration of fuel in the country,” Mr Rotich said. “This has denied the oil marketers business in the neighbouring countries in addition to giving them a bad reputation. In addition, adulteration negatively impacts car engines and increases their maintenance costs. In order to discourage this harmful practice, I propose to introduce excise duty on kerosene at Sh7,205 per 1,000 litres.”

The duty, which was removed in 2011, was at the time intended to cushion low-income earners against high prices of kerosene. Over that time, the cost of a litre of kerosene has been consistently more that Sh30 cheaper in the monthly fuel price revisions by the Energy Regulatory Commission. In May Kerosene was priced at Sh46 per litre. The next review is in a week.

Although the cost of kerosene has gone up, Mr Rotich also proposed to reduce the prices of stoves by lowering import duty on the products from 25 to 10 per cent. Liquefied petroleum gas will also be cheaper in the proposals to amend the VAT Act and exempt them from VAT. This could encourage poor families to switch from kerosene to gas for cooking.

The poor will also share the burden of the increased Road Maintenance Levy which has now been increased from Sh12 per litre to Sh18 per litre of petrol and diesel. The increase meant to raise funds for road maintenance will have a ripple effect on the cost of transport and manufacturing. This is in turn, set to effectively increase the prices of basic commodities further hurting the common man.

However, the poor will not suffer alone. The middle and upper class will now have to dig deeper into their pockets to import vehicles worth over Sh1 million after the CS amended the Excise Duty Act, 2015, to revert to the earlier 20 per cent duty on the price of motor vehicles.

FAVOUR THE RICH

Last year, imported vehicles aged more than three years were required to pay a flat rate of Sh200,000 while newer cars were charged Sh150,000. When the move was taken last year, it was criticised as skewed in favour of the rich who were able to afford newer and more expensive cars. Now, each imported car will be charged a duty equivalent to a fifth of its value.

Women have not been spared either. Mr Rotich proposed to collect more taxes from cosmetics and beauty products which will now be charged excise duty at the rate of 10 per cent.

The products affected include skin lotions, shampoos, hairstyling products and perfumes. In the past, these products have not been subject to excise duty in Kenya although they were excisable in the rest of East Africa.

Wednesday’s was the fourth Budget under the Jubilee administration and comes only 14 months to the next election.

Mr Rotich proposed tax concessions for property developers who build more than 1,000 houses a year, reducing their corporate tax from 30 to 20 per cent.
Deloitte East Africa Associate Director Gabriel Ouko said the incentives in the housing sector largely presented an irony.

“After the Government estimated the requirements of housing units to be 200,000 — with an annual deficit of 150,000 — there is a proposal to encourage investment for low cost housing by reducing tax for those who construct 1,000 units a year,” said Mr Ouko. However, he wondered how many investors had the capacity to build such a large number of houses.

“If one is to look at the last year how many would have taken advantage of this incentive? Would it not make sense to bring the threshold down to say 100 houses?” he asked.

Besides large-scale developers, the Budget also proposed relief for tea and sugarcane farmers after the CS proposed to remove the many levies they pay, including the tea and sugar development levies.

BOOST FARMERS' EARNINGS

The move is expected to boost farmers’ earnings. Instead of asking farmers to pay this money, the beneficiary institutions will now begin drawing funds from the Exchequer.

“In addition, Mr Speaker, I also intend to remove all other levies including levies charged by National Environmental Management Authority and National Construction Authority in order to reduce the cost of doing business,” Mr Rotich said.

Workers will also have something to smile about. Those in the lowest income tax band (earning below Sh10,165 per month) will now have their bonuses, overtime and retirement benefits exempted from tax. The government proposes to expand the tax bands and increase personal relief by 10 per cent.

“These measures are meant to cushion the workers from high cost of living and demonstrates our commitment to sharing the growth of our economy,” Mr Rotich told the National Assembly.
The proposals are now set for debate in the National Assembly.