A professor was giving a big test one day to his students. He handed out all of the tests and went back to his desk to wait. Once the test was over the students all handed the tests back in. The professor noticed that one of the students had attached a $100 bill(Sh10,070) to his test with a note saying “A dollar per point.” The next class the professor handed the graded tests back out. This student got back his test, his test grade, and $64 (Sh6,444.80) change.
For once in a long time, Kenyans have been collectively tested on their financial knowledge, and the score is not looking good. The annual reading of the national budget, which traditionally happens in June of every year, is a mundane affair with the ordinary mwananchi hardly bothered by the events in Parliament.
But corporate Kenya pays keen attention for any changes in taxation rates will trigger internal discussions on how that impacts on the pricing of products, and how much of that can be absorbed or has to be passed through to the consumer without hurting sales, the elusive “sweet spot”.
The ordinary mwananchi only wakes up to smell the government budget roses when she goes to purchase goods and realizes that her total basket has become more expensive.
The 16 per cent VAT on fuel products was initially introduced in 2013 but given a three-year grace period for implementation. Using the now familiar process, Treasury carried on the VAT exemption in the Finance Bill 2016 for a further two years.
The can was kicked down the road with the full appreciation that said road would come to a dead end after the election cycle. Because, you know, one doesn’t bite the hand that, you know.
The rolling can came to a shuddering halt on September 1, 2018 when the exemption officially came to an end. Legislators hemmed and hawed about how the Kenya Revenue Authority (KRA) was giving instructions for application of the 16 per cent rate when they had personally removed that nefarious clause via an amendment to the Finance Bill 2018 that was awaiting a presidential signature into law.
But KRA are no fools, having worn the cloak of legal authority from their reading of the original Finance Act 2013 which provided a three-year exemption on application of the tax, which exemption expired in 2016, was further delayed in the 2016 Finance Act to September 1, 2018.
The 2013 and 2016 Finance Acts are law and therefore have been and still are in effect until subsequent law makes any changes to them. Directions were given: Apply the new rate with immediate effect.
How we thought that kicking the now weather beaten VAT exemption can down the road for another two years would be panacea to what ails our budgeting process beats me. Folks, we have a Sh 558 billion deficit. Expected revenues in FY2018/19 are Sh1,997 billion against a budgeted expenditure of Sh 2,556 billion.
VAT is expected to contribute at least 24 per cent or about a quarter to the total revenue. The only way a discussion can be had about reducing fuel related VAT to 8 per cent or kicking the can down the road for an illusionary two more years is if we are willing to discuss chopping off some of the Sh2.5 trillion expenditure.
But that would take time and significant resources to try and unpack where the fat in our recurrent expenditure can be trimmed. Using a zero-based budgeting approach, for instance, would be a good start. With this method, the budget begins from a zero base and every single function within an organisation is analysed not only for its line item needs, but what those cost.
The budget would start from ground zero, rather than an increase or decrease from the previous year. This would provide the much needed granularity in the analysis of what makes up the government’s recurrent expenditure, that is currently budgeted at Sh 1.1 trillion, and how much of it actually requires to be spent or budgeted for based on its impact on service provision to the ordinary mwananchi. Initially an excruciatingly painful exercise for finance and accounting officers in an organisation, it helps to weed out historical inefficiencies in the cost budgeting process.
Today the ordinary mwananchi would say: “kimeumana” (things are tough). Whether it was in 2020 as the MPs were purporting to introduce, or now, the VAT exemption on fuel had to happen.
Because we have bitten the apple from the tree of unchecked expenditure and, dammit, that fruit tastes good. So let’s stop our wailing and gnashing of teeth. It’s getting old. We need to ask harder questions about where our taxes are going to, because boy have we been schooled about tax management!