In June 14th 2012, the incumbent Finance Minister, now President of the Republic of Kenya, His Excellency President Uhuru Kenyatta unveiled the VAT Bill 2012. The bill was a culmination of intensive work seeking to provide maladies afflicting the Kenyan tax system.
What disappoints is that public commentaries on the bill emanating from all quarters including KAM which I Chair, trivialized the debate without a considered attempt to internalize fundamental underpinnings of the proposed VAT legislation.
In a speech to ICPAK in June 2012 the KRA Commissioner General – Mr. John Njiraini truly captured the fundamentals. Allow me to highlight the two key questions that underpin my support of enactment of the VAT Bill 2012.
First is the need for simplicity in Kenyan tax laws in order to reduce complexity and cost of compliance. Secondly, the need to address the VAT refund pain and quagmire.
Simplicity implies that tax laws need to operate on basis of few general cross cutting rules with few exceptions. What this means for VAT specifically is that there should be only minimal exceptions to the general rate of 16%. Introduction of many exceptions to VAT in Kenya has complicated the existing law and created fertile ground for disputes between taxpayers and the tax authority.
Today a significant amount of private sector and KRA time is spent verifying whether varied rules contained in VAT laws has been has been correctly applied and in chasing refunds at Times tower. Due to the valid need to contain potential abuse of the VAT refunds system, KRA now requires taxpayers to provide detailed and ridiculous schedules of the various categories of goods (i.e. general rate, zero rate & exempt goods) as part of monthly VAT declaration.
How much easier would life be if we only had one tax rate?
When the existing VAT act was enacted in 1989, only goods meant for export were zero rated; today the list of zero rated goods is in excess of 400 items. It is not unfair to claim that administration of VAT as is today and compliance to VAT act as simply chaotic. Many businesses do not comply to VAT jeopardizing competitiveness of the players who comply. Many ‘cowboy entrepreneurs’ are pushing genuine/compliant entrepreneurs out of business and denying government the revenue they need to fund much needed education, health, infrastructure and social projects.
The second issue relates to the quagmire of VAT Refunds. Total portfolio of VAT refunds owed to private sector stands at approximately Ksh 27 Billion today. The figure would be much higher if policymakers did not discontinue withholding VAT system in July 2011. Treasury affords to only allocate Ksh. 12 Billion to settle VAT refund claims in any given year. Less than half the requirement. This has stifled growth of manufacturing for exports (less jobs for Kenya) and increased temptation for corrupt practices in accessing VAT refunds at KRA.
The primary and possibly the only remaining cause of VAT refunds is the zero rating of products. In other words, if zero rating were abandoned, the VAT refund pain would disappear. True, the eventuality of abandoning zero rating is not realistic. Nevertheless, the utopian scenario poses the question of extent to which Kenya as a society is prepared to accommodate tax subsidies associated with VAT zero rating.
VAT refunds reflect the cost to government of the decision to subsidize consumption. Whilst such subsidy is justifiable in limited cases, a review of the many items presently included in the zero rating schedule does not provide a justifiable ‘public interest’ objective for their continued retention. In deciding whether to subsidize consumption or not, we have to weigh the cost of such subsidy against other sacrifices the public needs to make e.g. number of extra kids from marginalized areas that could be provided with bursaries, the additional health clinics we could build in needy regions, laptops for school kids, hiring 10,000 extra police for security and equipping them, financing CDF etc.
The argument that removal of VAT zero rating makes basic foods expensive is of course popular yet lacking in serious policy depth that is needed to address Kenya’s national challenges. Moreover, is VAT zero rating the most efficient way to address such issues as the cost of basic necessities? Consumption related tax breaks such as VAT zero rating generally extends benefit to the rich who do not require them. The rich who do not require tax subsidies have similar access to the same items that are VAT zero rated as the poor.
Socially desirable goals ought to be addressed by expenditure side interventions of the national budget as opposed to revenue side interventions.
Example to illustrate, when educational materials are zero rated the benefit extends to rich parents who take kids to expensive private schools. An expenditure side intervention in this case may require the imposition of tax on educational materials across board such that everyone including the rich pay. To alleviate the burden on the poor, government may introduce subsidy scheme for public schools where grants are provided for schools to purchase educational materials. This option achieves equity where the rich pay tax while the poor access provision of funding by government.
We face a policy choice. Private sector ought to fully support the enactment of the VAT Bill 2012 to enable access to long outstanding refunds. The economic benefit of VAT Bill 2012 by far exceeds the costs. My plea is to parliament to enact the VAT 2012 Bill and help ease cash-flows for business.
Chairman Kenya Association of Manufacturers