KRA would forgo Sh4.25bn if VAT law reviewed, says House report

The Kenya Revenue Authority would forgo revenue of at least Sh4.25 billion if Parliament agrees to remove eight goods and services from the Value Added Tax bracket, the Parliamentary Budget Office has said.

The removal would however ease the cost of living, increase disposable income- money people have to spend- and there would be other effects, the Parliamentary Budget Office (PBO) said in a report presented to the Budget and Appropriations Committee.

“The financial implications of key proposals in the draft Bill include the revenue losses to the tax authority, benefits to consumers and users of affected supplies, and multiplier effects consisting of inflationary pressures and changes to economic growth,” PBO said in a presentation.

The proposal to amend the VAT Act has been made by John Mbadi (Suba, ODM) and was discussed by the Budget and Appropriations at a meeting Tuesday morning.

According to the Kenya National Bureau of Statistics, the inflation rate after the enactment of the Act rose to 8.29 per cent in September, the month it came into effect, from 6.67 per cent in August.

Among the goods and services Mr Mbadi had proposed to have removed from the VAT bracket are; feeds from waste vegetable material, insecticides, herbicides, newspapers and journals, credit reference bureau services and postal services.

Others are; supply of domestic electricity of not more than 200 Kwh, water drilling services and supplies to the Rural Electrification Authority.

In the meeting, the Budget Committee agreed to have the goods and services removed from the VAT bracket except newspapers, journals and periodicals.

“Some of the amendments such as those seeking to exempt infant milk and milk products, bread and M-Pesa services are inconsequential since these supplies are already exempt under the Act,” the PBO said.

COUNTERACT INFLATION TREND

Overall, it said, a section of the amendments could help counteract the inflation triggered by the enactment of the VAT Act.

The enactment of the Act was followed by an increase in the price of goods such as milk and bread. After KRA issued a clarification of the Act’s effects, the price of milk went back down.

Consumers will be the biggest beneficiaries if the supply of electricity to households removed from VAT as they would save Sh1.761 billion, with the Rural Electrification Authority saving Sh94 million.

KRA would lose Sh183 million in foregone revenue on animal feeds, PBO said, but the benefit to farmers would exceed the expected revenue losses.

Sh216 million would be lost if insecticides, fungicides and herbicides are removed from under VAT but farmers would again benefit immensely.

The rejected proposal to remove newspapers and journals from VAT would have led to a loss of Sh1.25 billion in revenue, according to PBO, and the prices of newspapers would have reverted to Sh50.

KRA would have to forego Sh184 million due to the exemption of credit reference bureaus services, the PBO said, but the benefits potentially exceed that.

PBO further said that the exemption of fishnets would ease the cost of inputs in the fishing industry.

PBO is charged with giving MPs an independent and well-researched opinion on the impact of Bills to do with finance and its suggestion is that it would be better off to pass the VAT Act as it would have a better impact on Kenyans.