Kenya’s Finance bill: Government hopes to raise taxes dashed by MPs

By Jeff Otieno
Posted on Wednesday, 22 June 2022 14:40

Kenya's Finance Minister Ukur Yatani presents the Government Budget for the 2022/23 fiscal year inside the Parliament buildings in Nairobi
Kenya's Finance Minister Ukur Yatani presents the Government Budget for the 2022/23 fiscal year inside the Parliament buildings in Nairobi, Kenya April 7, 2022. REUTERS/Monicah Mwangi

Hopes by the Kenyan government to raise extra revenue, through tax increases, to fund its billion-dollar budget were dashed by members of parliament. The legislators say the move would hit public agencies critical to delivering a free and fair election. But analysts say they are more likely fearful of angering the electorate ahead of polls.

When the National Treasury handed over its budget proposals for the financial year 2022/23 to parliament’s Finance and National Planning Committee for approval, many of its members considered the document a poisoned chalice.

The document, commonly referred to as the Finance Bill, had proposed a number of goods for tax increment to enable the government collect an extra KSh51.6bn ($441m) to finance its KSh3.33trn ($28bn) budget, one of the largest in Kenya’s history.

“We were in a catch 22 situation: Approve the taxes and face the wrath of the electorate, or reject them and deny the government extra revenue,” says a member of the committee who requested anonymity because of the sensitivity of the matter. “Instead, we agreed to go with the latter. It was a difficult choice though.”

The committee, chaired by Homa Bay Woman Representative Gladys Wanga, has one eye on the forthcoming general election as the members will be defending their parliamentary seats. Approving the proposed tax increments would be giving ammunition to their rivals who want to unseat them.

There is no way we would have allowed the government to remove VAT exemption from maize and wheat flour, which are basic commodities

The committee chaired by Homa Bay Woman Representative Gladys Wanga had one eye on the forthcoming general election. The members are defending their parliamentary seats and there is no way they could give ammunition to their competitors who want to unseat them.

The committee comprises allies of the two leading presidential contenders, former Prime Minister Raila Odinga and Deputy President William Ruto, who rarely agree on issues. However, this time round, they were unanimous that the tax proposals would harm Kenyans who are already bearing the brunt of the high cost of living.

However, this time round, they were unanimous that the tax proposals would harm Kenyans who are already bearing the brunt of the high cost of living.

“The committee argued that passing the Bill in its current state would increase taxation on basic commodities and make life unbearable for many Kenyans,” said Wanga after the members concluded their work.

Legal framework

The Bill is normally debated and passed every financial year to provide the legal framework for financing the country’s expenditure plans. Amendments are made at the committee stage.

There was a proposal to increase taxes on motorcycles; cosmetics and beauty products; jewellery; beer; wines and spirits; chocolate and bottled water.

In the document, there was also a proposal for removal of the tax relief accorded to suppliers of maize flour and wheat flour so that the government can impose a 16% value added tax (VAT) on the two products.

The move would have led to a further increase in the prices of maize and wheat flour as suppliers would have transferred the extra cost to consumers.

The price of maize, for example, has hit an all-time high due to poor harvest and lack of adequate supplies in the East African Community (EAC) trade bloc. A two-kilogramme packet of maize now retails at KSh150 ($1.28) up from an average of KSh120 ($1.03) less than two months ago.

“The price of maize has gone up because the product is not readily available in the market,” says Rajan Shah, the CEO of Capwell Industries.

The same applies to wheat flour whose prices have been rising since Russia invaded Ukraine. The price of a two-kilogramme packet has risen by 28% since April to retail at KSh200 ($1.71) for the first time in four years.

“There is no way we would have allowed the government to remove VAT exemption from maize and wheat flour, which are basic commodities, given the harsh economic conditions in the country,” says the committee member.

‘Sin tax’

A proposal to increase taxes on motorcycles was also rejected out of fear of backlash from boda boda (motorcycle taxi) operators – a core voting bloc. Azimio and Kenya Kwanza, the two leading coalitions, are courting the operators who are estimated to be over one million countrywide.

The legislators also turned down a suggestion to levy 10% tax on bottled water and other non-alcoholic beverages.

In a surprise move, the MPs also declined to increase tax on beer, commonly known as ‘sin tax’, warning that the move would lead to a rise in  consumption of illicit and dangerous brews.

“We need to support our sorghum farmers who supply our beer manufacturers,” said Kikuyu MP Kimani Ichung’wah during debate in parliament.

Being an election year, it was obvious the MPs were not going to allow any proposal that would have further burdened an already overtaxed population.

The Treasury’s proposal to exempt duty on imported fertilised poultry eggs was also denied, with MPs insisting that local poultry farmers must be protected.

Consumers of wines and spirits were not lucky as MPs adopted a proposal to retain the excise rate at KSh208.20 ($1.78) per litre.

The legislators also slapped a 10% excise duty on imported cellular phone SIM cards to protect local manufacturers.

Consumers of cosmetics and beauty products will also have to dig deeper into their pockets after the MPs resolved to impose a duty of 15% to discourage fakes and counterfeits.

Sleepless nights

The rejection of the majority of the tax proposals by parliament will definitely give President Uhuru Kenyatta’s administration sleepless nights over how to raise extra revenue to fill the KSh846bn ($7bn) hole in the KSh3.33trn ($28.4bn) budget.

“Being an election year, it was obvious the MPs were not going to allow any proposal that would have further burdened an already overtaxed population. The only option the government has in this case is to borrow,” says Githinji Kariuki, a tax expert.

However, the elephant in the room is that the government has almost exhausted its public debt ceiling, which is pegged at KSh9trn ($76.9bn). The actual public debt currently stands at KSh8.6trn ($73.5bn), which means unless the limit is expanded, then the government may not be able to finance its budget as it can only borrow up to KSh400bn ($3bn).

Treasury Cabinet Secretary Yukur Yatani recently issued a gazette notice to amend the Public Finance Management Regulations, 2015, to increase the debt ceiling from KSh9trn ($76.9bn) to KSh10trn ($85.5bn)

“Regulation 26 of the PFM (national government) regulations, 2015, is amended by substituting it with the provision that the public debt shall not exceed KSh10trn,” the gazette notice says.

According to Kariuki, it will be a challenge to have the amendment passed given that MPs allied to the deputy president have vowed to ensure the government  adheres to the KSh9trn debt limit.

“Increasing the borrowing limit is not an easy affair because both houses [National Assembly and Senate] have to agree on the new debt ceiling and with elections around the corner it is a tricky affair given that the two houses will  adjourn to allow MPs to campaign,” says Kariuki.

The dollar shortage

According to the Senators, the move to raise the debt ceiling was justified due to the unfavourable events namely the Covid-19 pandemic and the ongoing Russia-Ukraine war which have seriously destabilised the country’s economy.

“There were submissions that warned us that if we do not raise the debt limit by one trillion we might fall short of repaying our loans,” says Senate Deputy Majority Whip Farhiya Ali.

Majority leader Amos Kimunya acknowledges that the budget deficit and the debt limit present a major challenge, especially in an election period, but he is confident that MPs will find a solution. “We are aware of the challenge we have before us and action has been initiated to sort it out,” says Kimunya.

The problem is worsened by a shortage of dollars in the country, which has made it difficult for businesses to import raw materials critical to their operations and the country’s economic growth.

Manufacturers have warned that the shortage is affecting their relationship with suppliers and risks destroying Kenya’s reputation as an open market.

The manufacturers through their lobby group, Kenya Association of Manufacturers (KAM), are complaining that they are buying dollars at an exchange rate of KSh120 ($1.03) above the formal quoted rate of KSh115 ($0.98).

“We have a huge import component and if the situation does not improve then some manufacturers may be forced to scale down and some may not even survive in such a situation,” says the KAM chairman Mucai Kunyiha.

Experts are worried that the economic woes in the country might force the government to reduce its budget, a move that might see funding for critical sectors like security, health and education reduced, which they say is a risky affair in an election period.

“Reducing funding to a critical sector like security in an election predicted to be one of the most competitive in Kenya’s history is courting disaster and the government must avoid that option at all cost” says Kariuki.

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