VAT Bill is likely to flop but most people don’t understand its import

Tuesday July 2 2013

 

By JAINDI KISERO [email protected]

I think the new administration of President Uhuru Kenyatta will need a great deal of fortitude to push the new Value Added Tax (VAT) Bill through. 

It is very unpopular. Worse still, it is not possible to conduct an informed debate about taxes and entitlements in Kenya right now.

All the elite – from both sides of the political divide – are currently obsessed with how to manufacture myths to score points against one another. And in this polarised political environment, myths matter more than facts.

My hope is that when the noise and bickering around the VAT Bill subsides – and even if the Bill is finally thrown out as is it likely to be – the opportunity will have come for a fact-based policy debate around government spending and tax reform.

There are several myths about the Bill which need to be dispelled. The first one is that by removing exercise and text books from the VAT Bill, the poor will be cushioned from high prices.

The truth of the matter is that when you remove VAT from school books, you cushion even the very rich people who do not need that support.

When you want to cushion the poor and vulnerable in society, the best way is to target them so that the support you are giving does not go to segments of society that do not need it.

Yet when you remove VAT from exercise books, you have more or less given an implicit subsidy to both the child who goes to Dr Livingstone Primary School in Nairobi’s Eastlands, and the child from a rich family who goes to an elite school like Brookhouse, Braeburn, Hillcrest, Peponi or the International School of Kenya.

How can you claim to be cushioning the poor when all you do is to give a tax break to the child who goes to an elite school and does not, therefore, need it?

The second myth is that by removing VAT on bread and processed milk, you cushion the poor.

It is a fact that a very large segment of the urban and rural poor rely on the lowest unit for measuring the quantity of maize flour (goro goro) for their ugali.

Granted, the processed bread you buy from the shelf at Nakumatt is consumed across classes – including the construction site worker whose lunch course is often a mere loaf, a bottle of soda or a pint of maziwa mala.

But it is also true that the very poor members of society depend on porridge, sweet potatoes, arrow roots and boiled raw bananas which are often taken in combination with a cup of tea or a mug of uji.

The majority of the rural poor in this country consume unprocessed milk delivered by the local milkman across the road.

Thus, when you remove VAT on bread and processed milk purchased from the supermarkets, the tax break mainly goes to the relatively well-off segments of society, who buy and consume large amounts of processed foods.

Mark you, the new VAT Bill has exempted all unprocessed stuff.

What then is my point? It is that if you want to cushion the poor, you have to target them directly.

When you do it by exempting them from consumption taxes, the tax break will go to those who do not need it.

Thus, the most effective way of cushioning the poor is to abolish school fees for both primary and secondary schools.

You cushion the poor by providing free medical services, and you cushion them through massive irrigation projects in which you can grow maize and rice in huge quantities especially in the coastal region.

Growing food in the western parts of the country is becoming more expensive because of fertiliser use.

And, you cushion the poor by spending on large infrastructure projects to bring the transport costs down, and to reduce electricity prices.

The fourth myth about VAT is that when you remove it from consumer products, manufacturers automatically reduce prices. We all know from experience that this has never happened.

Two years ago, the government removed VAT on milk, bread, kerosene and other commodities ostensibly to cushion the poor from inflation. It did not work.

The government could only plead with manufacturers to bring prices down. VAT needs a major surgery.