As food prices rise, brace yourself for an Unga war

Long before the Cabinet Secretary for National Treasury Henry Rotich announced the re-tabling of the controversial Value Added Tax (VAT) Bill, civil societies under the banner Kenyans for Tax Justice had started laying the groundwork for countering the piece of legislation that, they argued, would spell misery for the vulnerable.

The campaign has seen over 10,000 people sign a petition that the organisers hope to present to Mr Rotich and Members of Parliament to press for a review of the Bill. The petition is online but organisers have also set up a toll-free hotline, 0708318318, for those who would like to ‘sign’ through a phone call.

Blessol Gathoni, one of the organisers of the No Unga Tax campaign, says they are not against tax or VAT per se, but the current Bill that seeks to impose a 16 per cent tax on basic commodities.

“The Bill proposes removal of exemptions that zero-rate basic goods,” she says. “This will literally starve a lot of people who are already economically marginalised. A study found that, for the poorest 20 per cent of Kenyans, almost 90 per cent of their food consumption was either tax exempted or zero-rated.”

Among the list of items that would attract the charge are sifted maize flour, sanitary towels, newspapers, journals and periodicals, rice, wheat flour, bread, computers and computer software, and processed milk.

But it is in the agricultural value chain that the pinch is expected to be felt the most. Farm inputs like fertiliser, insecticides, pesticides, livestock feed and locally assembled water pump subsidies are on the scrap list as Treasury grapples with expenditure pressures.

“The government will be faced with almost instant realities of low food production and mass food imports which will deny the country a lot of revenue as well as strangle agriculture-related industries that rely on locally produced raw materials,” Consumer Federation of Kenya (Cofek) secretary general Stephen Mutoro said last week.

The effects would cascade down to the poor and vulnerable, with food, which eats into a sizable portion of their income, becoming increasingly expensive. Food processors argue that it would be unrealistic to be expected to shoulder the burden of the extra tax, indicating that this would be wholly passed onto the consumer as they seek to protect their bottom lines.

Matu Wamae, the New KCC chairman, says the sector has very little leeway in terms of pricing.

“With higher taxes, our sales will suffer. The farmer will also be at a loss as he will want to recoup money spent on more expensive inputs. Hawkers will have a field day selling unprocessed and sometimes adulterated milk,” he adds.

Critics have also added that the Bill flies in the face of the Jubilee government’s stated commitment to reducing the price of food. During his inauguration speech, Deputy President William Ruto made an impassioned declaration of the new government’s commitment to reducing food prices for the poor.

“Wale ma-sufferer wanataka kujua wakienda kwa kiosk ni lini bei ya unga itatoka shilingi mia moja ifike shilingi sitini (The long-suffering man wants to know when the price of a packet of maize flour at the kiosk will come down from Sh100 to Sh60),” Mr Ruto said.

But Mr Rotich, the man in charge of Kenya’s finances, seems more intent on plugging KRA’s deficits than meeting that promise, saying the Bill would enable the taxman to collect an extra Sh10 billion.

Economic analyst Polycarp Ngoje, however, sees this as a zero-sum game. “It would be unwise to tax food,” says Mr Ngoje. “This gives labour unions justification to demand higher wages as the cost of living will rise considerably.”

The expenditure demands exerted by devolution, a rising wage bill fuelled by constant demands by public officers as well as pressure to introduce development projects across all sectors, have seen Treasury opt for the unpopular Bill to plug its deficits.

Also, financing the Sh1.6 trillion budget for the 2013/14 financial year, which begins July, will put KRA under pressure to meet the set target of Sh880 billion. The ambitious target exceeds the Sh850 billion goal for the current financial year which the taxman has been unable to achieve.

By the end of the third quarter ending March in the current financial year, KRA had managed to collect Sh560 billion, with the taxman expecting to collect Sh723 billion by end of June.

This has prompted the government to go on a borrowing spree both locally and internationally, pushing public debt to over Sh1.8 trillion, or about 45 per cent of the Gross Domestic Product, which leaves little borrowing space to finance Mr Rotich’s budget.

But while the ordinary man on the street is vehemently against this new legislation, most economists and accountants agree that, on the whole, the Bill is a decent piece of legislation as it addresses the vexing issues of refunds as well as eases administration and compliance for the taxpayer.

Nevertheless, tax experts fault it for not recognising the pain it would inflict in its current form. Nikhil Hira of Deloitte says of most concern is the taxing of basic food commodities when the country is experiencing such high poverty and dependency levels.

“The argument that has been put forward is that unprocessed food will remain exempt and the poor in our society rely on this,” he says. “I do not agree with this view because the poor are widespread. In the slum areas of Nairobi, unprocessed food is not always available.”

Currently, the VAT Act has over 400 zero-rated items, a steep rise from its inception in 1989 when only export items attracted the zero per cent charge. In the VAT Bill 2012, almost all these items have been scrapped, with the most notable relief for the poor being that cereals, fresh vegetables, eggs, unprocessed milk and fruits are exempted from tax.

Other items like petroleum products that have domestic and commercial use, especially in transport, are classified under exempt goods on transition. They will thus be exempt for a period of three years from the date of the law’s enactment, meaning consumers would have to brace themselves for a second wave of pain.

The budget pressure and the strong resistance to the VAT Bill have seen the government caught between a rock and a hard place. So, what are the options?

The most common view that seems to have gained traction with some experts is that there should be a list of basic commodities that should remain zero-rated, given the economic realities in Kenya.

In a position paper on the draft VAT Bill 2012, former Institute of Certified Public Accountants of Kenya (ICPAK) chairman Patrick Mtange argues that it would be more prudent to define the basic commodities and ensure they are zero-rated.

“We will attempt to define basic commodities as the essential goods that support life and the desire would be to link these goods to what social scientists would define as the goods meeting the basic core needs. Given the diverse nature of the people of Kenya, it may not be tenable to prescribe a conclusive list of the basic commodities,” says Mtange.

He further proposes that the Cabinet Secretary, with the approval of Parliament, be empowered to prescribe the commodities to be considered as basic.

The biggest problem with this position, according to critics, is that it extends the benefits of subsidies to the rich, who do not need them.

This can be tacked by taking a different route. Several economists, including Kenya Association of Manufacturers chairman Polycarp Igathe, advocate for expenditure side interventions which would essentially give subsidies to the poor while taxing the rich.

The nature of these interventions, however, remains an administrative challenge given that the country suffers a high corruption rate.

“The counter argument against blanket zero-rating would be that such a system would extend this benefit to the rich and undeserving segment of society, and that the Government would find ways and means of administering subsidies to cover the poor. Historically, this has been a hard feat to achieve and the concerned benefits would, in our view, not reach the intended disadvantaged part of our society, not to mention the consequential costs,” says Mtange.

A third proposed option is the widening of the tax base and enforcing collection. Polycarp Ngoje says KRA should seek to increase its collection rate for already approved taxes, for example, the tax imposed on landlords. He argues that the tax body has not even collected 10 per cent of this amount.

“I feel that increasing tax rates is not necessarily the solution to our problem. Higher rates often result in more evasion whereas lowering rates brings in more revenue. Treasury and the KRA have to be innovative and improve enforcement. It is important for us to go after the evaders and bring them into the net,” adds Nikhil Hira.

Cofek’s Stephen Mutoro has suggested that besides introducing new taxes like capital gains tax, the government ought to seal all revenue leakages and eliminate wastage of resources. Additionally, a more drastic solution has been proposed that would see the Treasury cut out non-priority spending to the extra amount that it expects to collect from the new law.