OWINO: Why VAT Bill is a tax raise by Parliament

Despite some public involvement in review and attempts to influence the outcomes of the VAT Bill 2013, Kenyan taxpayers got the short end of the stick.

When private sector voices come to argue for the merits and demerits of a bill after passage by National Assembly, it is a sign of dissatisfaction with both the process and outcome. It’s truly curious, if not bad posture, that the leadership of the KRA is the most prominent voice in providing justification for the details and contents of the law.

Ideally, the process of securing a tax reform measure is a political contest between the executive and the legislature. So what’s happening and what did parliament miss?

What is evident is that the VAT Bill, 2013 that passed in parliament has few defenders with voices stating that the exemptions that it provided for about two dozen items were not deep enough. As a result, even the National Assembly that is the purse holder and the institution that is responsible for any tax changes has no strong defence for the bill as it awaits assent from the executive.

As presented and passed, the new law bears certain indisputable strengths. Among them is that it creates a less complex terrain for VAT compliance and determination starting with the reduction in the number of exempt goods and services from 3,000 to less than 50.

Judging purely from the perspective of neat law making, that bill is better than its predecessor, which created numerous exemptions and loopholes for cheating. Thus the Cabinet Secretary was right to suggest to parliament that the abolished act provided a very wide set of exemptions and created undue complexity in administration.

OPAQUE

At the same time, this reduction in the number of exempted items means that the administration of the system has not only been vastly simplified but also cleaned up the mechanism for refunds that was unduly opaque.

It is surprising that while the National Assembly through the Committee on Finance took representations from Kenyans, it failed to address itself to the important question of tax neutrality. The VAT Bill that the National Assembly endorsed extended the application of Value Added Tax to virtually all services and goods and thereby widened the tax base.

This was accomplished not only by reducing the exemptions but also by proposing to raise the VAT rate to 16 per cent for all items, including those that had a lower rate such as electricity and fuel. With a transition period of three years, the standard rate for VAT will be 16pc for all of them.

While it was not clearly admitted by Treasury, the effect of widening the tax base and maintaining the tax rate for VAT is effectively a rise in taxation. If as was stated in earlier iterations of the bill, the intention was not to raise taxation levels but merely to close existing loopholes, then the standard rate of VAT should have been reduced to make the bill revenue neutral.

That this did not happen shows that in the discussion of taxation, the National Assembly did not care for revenue neutrality and instead allowed itself to read from the prepared script of the executive that failure to pass the bill would create large revenue shortfalls.

TAX AND SPEND

To state it plainly, the National Assembly is responsible for a tax increase and cannot shift this responsibility to another arm of government. The National Assembly allowed itself to easily approve a tax increase that was not necessary and refused to take lead in reducing tax rates.

That a number exemptions were provided for a few common goods and medical equipment does not take away the fact that parliament seems neither able to restrain public expenditure nor to stand with Kenyan households and firms in preventing tax increases.

Given this early start, this is truly a tax and spend legislature that is far too eager to please the executive and less willing to stand firmly as a guard against tax raises. It is therefore as responsible for the growing public debt as the executive is.

Kenyan taxpayers should worry that with this attitude taxation reform is not likely to result in reduced burdens of compliance but mostly about increasing taxes on Kenyan households and firms. Parliament is really the taxman now.