Dreams of affordable housing will go up in smoke

A storm is brewing in the country over the implementation of the new fuel levy by the National Treasury.

On the one hand, the Treasury and the Kenya Revenue Authority stand firm by their decision to collect Sh70 billion through the 16 per cent value added tax (VAT) on petroleum products, ignoring the public mood, which parliament, one the other end, seemed to have read quite well last Wednesday when MPs voted to postpone its implementation for another two years.

There is no telling what will happen in the coming days as Treasury Cabinet Secretary Henry Rotich, who could have exercised his powers to suspend the introduction of the new tax pending the President’s assent of the Finance Bill, 2018, seems unlikely to budge.

But what is certain is that the tax is bound to greatly affect Kenyans, who, experts say, are already heavily burdened with taxes.

The increase in fuel prices means a ripple effect across all sectors of the economy, including agriculture, manufacturing, transport, tourism, building and construction, energy and healthcare.

Consequently, ordinary Kenyans are staring at tough times ahead, with the prices of food, transport, electricity, healthcare, and housing, among others, expected to go up.

But just what does this new tax portend for the property industry? We sought real estate players’ views on the matter, given the government’s spirited campaign to make housing affordable under its “Big Four” agenda.

CONSTRUCTION MATERIALS

Speaking at his office in Industrial Area, Crown Paints Kenya Group CEO Mr Rakesh Rao told DN2 that the immediate impact will be the loss of cash flow for one month.

“We use a lot of oil solvents to manufacture our oil-based paints — actually more than 200 metric tonnes every month. Therefore, if the supplier introduces the 16 per cent VAT, it means we will have to pay them more money. And that’s how we will lose our cash flow. But the good thing is, as manufacturers, we will claim back the VAT,” he said.

That means Crown Paints will not pass on the VAT to consumers. But he warned that the prices of paints are likely to go up eventually.

“We will not pass this particular cost on to the customer, but later on, if the transporters increase their price by 16 per cent, this will be passed on to the client. Looking at our monthly expenditure on transport, we are talking of a 4-6 per cent increase in the price of a can of paint,” said Mr Rao, adding that the upcountry market will be hit hardest.

Similarly cement and steel manufacturers will raise their prices. The cost of three most important components of construction going up negates the government’s objective of keeping the cost of housing down.
According to a cement dealer and paint dealer who works closely with Crown Paints, the price of a bag of cement will go up by from tSh580 to Sh610.

Addressing stakeholders in the construction industry during the inaugural Construction Industry Awards (COINA) 2018 at the Carnivore Restaurant last month, Housing CS Charles Hinga hinted at the government’s intention to approach manufacturers to strike a deal that will see them offer favourable prices for the construction materials to be used in the construction of low-cost houses. But even as he prepares to go to the negotiating table, now with the new fuel levy, manufacturers say, it would appear like he has shot himself in the foot.

AFFORDABLE HOUSING

“We welcomed the idea of affordable housing and we have been working with our research and development team to come up the appropriate products. We are set to launch a paint next month that will go for Sh100 but with an increase in transportation cost looming, and considering our distribution channels, that price might go up. And that is a water-based product so you can imagine what will happen to oil-based products,” said Mr Rao.

According to manufactures this makes a mockery of the government’s commitment to making housing more affordable.

For his part, Mr Rao believes that the government should not introduce a new tax but instead consider lowering VAT on raw materials for affordable housing by say 5 or 6 per cent for the next three years. This, he says, will entice more people to do business.

“If you look at the amount of construction expected to happen, we are talking of injecting billions of shillings into the sector. This means growing business by three or four times, thereby creating millions of jobs and having a significant impact on the economy. Well, the government will not get money directly through taxation but the impact on the economy will be humongous. Later the government can go back to charging normal rates for VAT,” said Mr Rao.

According to Mr Francis Kihanya, CEO of Manyatta Capital, what is at stake is the cost of ongoing and upcoming projects, which could rise tremendously. He says transport is a key factor in construction, accounting for about 30 to 40 per cent of the overall cost. That is why your construction cost will be cheaper or more expensive depending on where you are building.

“In most cases, transport costs will be higher than the cost of labour, so this is not something you can brush aside. This is because proximity to sand and quarry stones, for instance, will have a huge impact on the overall construction cost because the cost of stones per piece will be dependent on the distance between the quarry and the construction site,” says Mr Kihanya.

With high transportation costs, there’s a likelihood suppliers of construction materials will cheat on the quality of these products just to keep their costs favourable to the client, offers Mr Kihanya. And with good reason.

CONSTANT COST

“Imagine a developer who insists that a machine-cut stone should be supplied at not more than Sh25 per piece, for example. So, in this case, the likelihood is that the supplier will look for a stones that are inferior s and supply them because the developer insists on maintaining a constant cost while the supplier, in contrast, has an extra transport cost. Unfortunately, most Kenyans cannot differentiate between the different grades of stones, and will most likely end up with sub-standard materials on their sites.”

As far as affordable housing is concerned, Mr Kihanya says, an increase in the cost of transport occasioned by high fuel prices presents two challenges: expensive construction, which goes against the goal of making homes more affordable and two, it will deter commuters who would wish to buy these affordable homes.

“If we’re looking for land to do mass housing, then we are talking of areas further away from the satellite towns as we know them. So if the cost of transport goes up, very few people will be willing to buy and live in these houses,” he says.

SAVING CULTURE

One of the major highlights of the 2018/2019 financial year budget was Mr Rotich’s announcement that the government intends to amend the Employment Act so that both the employer and the employee contribute to the National Housing Development Fund, a kitty that will be used to finance low-cost housing.

The Treasury set the low-cost housing deduction for employees at 0.5 per cent of the gross pay per month, as long as the contribution does not exceed Sh5,000.

For example, an employee earning Sh100,000 will contribute Sh500 every month, rising to the maximum Sh5,000 for those earning Sh1 million and above.

NO FREE HOUSING

Still, this is not enough and Mr Francis Kamande, the National Housing Co-operative Union (Nachu) national chairman, says that it should be clear by now that there will be no free housing, and that all the government intends to do is to make subsidies to bring down the cost of housing and make housing more accessible to the average person.

He expressed concern that this tax will interfere with the saving culture of Kenyans.

“A majority of Kenyans are now saving towards their housing dream, so this tax will affect the saving culture because the average income of an average Kenyan is low so saving is usually a Herculean task. For instance, if someone was saving Sh5,000 a month, then they might have to reduce that to, say Sh4000 or less. So when you factor in this additional tax and the fact that it might raise the cost of living for them, then in one way or another it will water down that very noble practice of saving,” offers Mr Kamande.

Nevertheless Mr Kamande believes for a country to succeed, taxes, like death, are inevitable. He went to great lengths to justify taxation.

“For Kenya to achieve the ‘Big Four’, all of us must acknowledge that there will be a cost for us,” he told DN2.

“Better healthcare, decent and affordable living, manufacturing, food and nutrition, these four areas are, in my view, at the heart of all of us and, therefore we must admit one thing: there must be a cost for Kenyans.”

He cited Belgium and Germany, a countries with high taxation rates — at 42 per cent and 39.7 per cent respectively — as good example of how income generated from within a country can help better the lives of its residents.

“This has ensured that these country’s citizens can access affordable housing, reliable medical care and children have access to decent education,” he said, adding that for Kenyans to make a difference, they must be ready for that kind of sacrifice.

But Mr Kamande is not blind to the corruption that has consistently eroded the people’s faith in the government. Although he is optimistic about the renewed fight against corruption, he says it will take much more to assure Kenyans that their taxes will be used for worthy causes.

“The biggest challenge and concern for many of us is corruption because it does not add value where people are highly taxed but the money goes to a few individuals. That, I am sure, is the concern of every average Kenyan,” says Mr Kamande.

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Genesis of the controversial VAT on petroleum products

Mr David Ngugi, an investment Analyst at Cytonn Investments, explained to DN2 how the country found itself in this position.

“Value Added Tax (VAT) to be charged on petroleum products was initially introduced through the VAT Act 2013, which was enacted into law on September 2, 2013.The Act, however, gave a three-year grace period, exempting petroleum products from VAT charge until September 1, 2016."

"Its imposition was also part of the fiscal policy commitments that Kenya had made to the International Monetary Fund (IMF) as per the letter of intent dated January18, 2016, aimed at improving revenue collection by the government in order to reduce the country's fiscal deficit. This was in a bid to be granted access to a Sh70 billion precautionary facility that was set to cushion the country’s balance of payments position against exogenous shocks."

In 2016, through the Finance Act 2016, the exemption on VAT on fuel was again extended for another two years September 1, 2018. During the reading of the 2018/2019 financial year budget, the National Treasury CS Henry Rothich indicated that revenues were projected to rise by 17.5 per cent to Sh1.9 trillion, up from Sh1.7 trillion in 2017/2018, with tax policy measures at the core of achieving the fiscal target. The imposition of the 16.0 per cent VAT on petroleum products effective September 2, 2018, was part of the measures."

"But it was shot down by the National Assembly, postponing the implementation of the tax by another two years to September 2020, subject to assent by the President — which has yet to happen — arguing that its implementation would lead to high inflationary pressures. Still, KRA has maintained that it must be implemented, and the Energy Regulatory Commission has already released an addendum to retail prices released on August 14 to this effect, raising the prices of super petrol, diesel and kerosene."