Wednesday, 4 September 2013

Statement by CORD on the Value Added Tax Act 2013

In an attempt to simplify and clean up the administration of the VAT, the government decided to drastically reduce the number of goods and services which have been zero rated or exempted from VAT.

Food fell into this category, and we have now seen such basic commodities like processed milk shooting up in prices much to the suffering of ordinary wananchi.

There is no doubt that a chain reaction in price increases will follow as costs of transport go up, costs of farm inputs increase and those who offer services to make the economy run put up their costs as well.

Soon, schools will raise fees because of growing cost of food and other consumables. Soon, students in colleges will be asking for increase in allowances for those on HELB loans to be able to afford life.

Parents of students not receiving loans will have to dig deeper into their pockets.

The levying of 16 per cent VAT on X-ray and Diagnostic services will deal a severe below to the health of Kenyans. To cut costs and accommodate poor patients, doctors will cut out X-ray and other diagnostic services and rely on clinical symptoms alone. The result will be increases cases of misdiagnosis and lots of death.

The new VAT law is going to hit the ICT sector hard, with price of phones and cost of talking going up.

The ICT sector contributed 5% to the growth of GDP in 2011-2012 from contributing 3.7% to the growth of GDP in 2010.

High pricing will reduce digital penetration and less penetration will reduce contribution to the GDP growth.

Youth are going to be hit hardest by an increase in mobile phone, computers and computer software prices.

This law will hurt the youth who dominate the startup businesses. People living in rural areas will be cut off the digital economy penetration. Of course it will hit hard the unemployed, majority of who are youth.

It must be recalled that in his 2009 Budget Speech, President Uhuru Kenyatta, as Finance Minister then, said:

“Mobile telephones have become an essential aspect of our daily communication and transaction system. To make the telephone sets more affordable to wananchi and expand the subscription base, I propose to exempt from VAT, all telephones, for cellular networks or other wireless networks. I do hope the dealers in these products will pass this benefit to ordinary wananchi by lowering prices.”

We challenge the President to explain this change of heart.

Savings are going to suffer as government levies tax on financial services, including banking and withdrawal of money.

Confused by statistics and economic verbiage, many Kenyans are unaware that each time they withdraw money from their accounts or make transfers in any form; they pay 10 per cent tax. This has pushed the cost of withdrawals up, as banks and other financial agencies pass the costs directly to consumers of the services.

We see a situation where Kenyans may be forced to withdraw and keep money under their mattresses.

We had earlier warned against a blind increase of VAT, especially when it comes to basic commodities and services which affect the lives of ordinary wananchi.

VAT is basically an attack on consumption trends and habits. It is the most cruel way for a government to raise money in an economy that is depressed and underperforming.
It works best in an economy that is overheating.
If the government wants to raise revenue, there are better, less painful ways of doing so without making taxation a burden.

Our Recommendations:

The most logical approach is to cut down on public expenditure, expand the tax base and reduce the tax burden of the ordinary wananchi while supporting the livelihood of vulnerable groups through social safety nets.

In fact, with the depression our economy is going through, this was the time to lower VAT from 16 to 14 per cent to encourage consumption and spending.

But we need to go further than that by redefining our food self sufficiency strategy, especially the production of such basic foods like cereals, vegetables and fruits.

With the onset of devolution, such a policy would focus on supporting large scale commercial production of basic foods in areas where costs are low and productivity is high.

When this is accompanied by household producers who have access to affordable farm inputs and effective government extension service, then economic growth will truly include ordinary wananchi.

Government investment in this strategy would produce better results in the short and long run than engaging in the punitive exercise of punishing the poor and vulnerable when VAT is increased across the board. In fact, we fear the increase in VAT may lead to failure by the government to meet its target in revenue as people cut down on consumption because they cannot afford.

Finally, while we must continue to invest in infrastructure so as to integrate our economy and stimulate growth, let us not forget the basic issues of poverty that still face us and the need to pay attention to basic needs.

We must scale up social safety nets, including cash transfer to urban poor, orphans, widows and vulnerable children. We do not agree that you can grow an economy simply by taking money from consumers.

This is a message that both the national and county governments need to take seriously and implement so as to avert a looming disaster of a glittering economy in terms of infrastructure when the bottom of society wallows in poverty.

SEPTEMBER 4, 2013.

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