Kenyans were Tuesday left bracing for hard times ahead after it emerged that President Uhuru Kenyatta’s memorandum to Parliament rejecting MPs’ position on petroleum tax came with new and higher levies on a wider array of goods and services.
The revelation came even as the National Assembly agreed to the proposals, including a doubling of excise tax on money transfer charges in exchange for a halving to eight per cent of the proposed valued added tax (VAT) on petroleum products.
If Parliament passes Mr Kenyatta’s proposals, mobile money transfer charges will now attract excise tax at the rate of 20 per cent from the current 12 per cent, while mobile calls and data will be levied at 15 per cent from the current 10 per cent in a move that could reverse the recent decline in mobile call costs.
At the heart of the President’s quest to introduce new taxes and increase old ones are the huge financing obligations in this year’s budget, including the Sh870 billion that must be spent on debt servicing to avoid default.
Mr Kenyatta also introduced a special “anti-adulteration” tax, to be charged at the rate of Sh18 per litre of kerosene, in a move that will push the commodity’s retail price much closer to diesel.
Both the ruling Jubilee Party and opposition MPs yesterday pledged support for the new tax measures, meaning they are likely to get parliamentary approval and define Kenya’s economy in the short term.
Mr Kenyatta said the measures are required to help mitigate a funding shortfall of Sh48.6 billion once the VAT on fuel is halved to eight per cent.
“The proposed amendments in the Finance Bill under Clause 18, which seeks to amend Section B of Part 1 of the First Schedule to the Value Added Tax Act, 2013, effectively extending the exemption for a further two years shall, together with the additional expenditures in the Appropriation Act, 2018 result in a major financing gap of the budget,” Mr Kenyatta wrote in a memorandum to the National Assembly.
“The amendments that I have proposed reduce the financing gap but do not eliminate the gap. To this end, the National Assembly needs to effect a reduction in the expenditure as contained in the Appropriation Act, 2018 by at least Sh55 billion.”
The controversial tax, which has significantly increased transport costs and is expected to cause a general rise in inflation, was expected to generate an extra Sh35 billion in the fiscal year ending June 2019.
Budget revised (Expenditure) Sh bn
Expenditure has been revised downwards by 2.9 per cent.
The levy, whose collection started this month, is now expected to rake in half the amount once the rate is reduced to eight per cent from 16 per cent. Besides the new tax measures, Mr Kenyatta has proposed bold moves aimed at reducing government expenditure, with the twin actions having the net effect of cutting the total budget by Sh55 billion.
From the initial Sh3.02 trillion, total spending is now projected to stand at Sh2.97 trillion after the cuts whose biggest victims are the national government’s development expenditure as well as disbursements to county governments. For consumers, the changes represent additional pain after the President declined to make even deeper budget cuts to ease the burden on ordinary folk as proposed by a section of parliamentarians.
Low-income households will be particularly hard hit by the introduction of the special levy on kerosene, a move Mr Kenyatta said is meant to curb fuel adulteration.
The tax will lift kerosene price above the Sh100 per litre mark for the first time and have it retail close to diesel and petrol, which are currently retailing at Sh115.4 and Sh125.5 per litre respectively in Nairobi. Rampant adulteration of diesel and petrol has been blamed on the significant gap between the price of kerosene and petrol and diesel. The higher tax on cash transfer charges ropes in all personal and business transactions conducted through the formal financial systems including bank and mobile money platforms.
Mobile telephone firms and banks, among other affected institutions, are expected to raise their charges in the wake of the sharp jump in taxation – in a move that once again hits the poorest segments of the population hardest.
The long-term drop in calling rates and data prices is expected to be halted by the move to hike excise taxes on the services to 15 per cent from the current 10 per cent.
In his memo, Mr Kenyatta laid an emphasis on generating more revenues from consumption taxes, adding that the measures are a continuation of the tax reforms that the country has been undertaking in recent years.