BusinessPeople Daily

Rotich’s Sh3tr spending plan, tax measures

Fred Aminga @faminga

Today all eyes will be on Treasury Cabinet secretary Henry Rotich as he unveils East Africa’s biggest spend planning ever, estimated at Sh3.07 trillion.

Rotich is banking on Tax Laws (Amendment) Bill, 2018, to raise funds which could increase the cost of basic commodities and income taxes. This means Value Added Tax (VAT) reforms will culminate in reclassification of zero-rated products to exempt status.

“The 2018/19 revenue performance is specifically linked to an array of tax reforms such as the Tax Laws Amendment Bill, 2018, which targets previously zero-rated basic goods such as bread and the Income Tax Bill meant to tax higher income earners and large business more,” said Robert Maina, tax expert at Ernst and Young.

Kenya Revenue Authority (KRA) has missed targets in the last four fiscal years and even issued a shortfall warning in the current financial year (2017/18) of Sh88 billion. In the next financial year, KRA is expected to collect Sh1.92 trillion up from Sh1.7 trillion.

Under the zero-rate status a product is cheaper because the manufacturer or supplier can claim back VAT but under the exempt regime the same commodity will cost more because the VAT paid on inputs or raw materials is passed on to the consumer because the manufacturer or supplier cannot claim it from KRA.

Currently, milk is zero-rated but if the bill becomes law, the cost of the commodity will go up as it will be classified as VAT exempt.

Similarly, the bill proposes to have maize flour, ordinary bread and cassava flour, wheat, maize flour containing cassava flour by more than ten percent in weight exempt from VAT.

While these products are currently zero-rated, the move to make them VAT exempt may have the adverse effect on the cost of living as tax liability will now be passed on to consumers.

Planned repeal of the Income Tax Act is expected to greatly influence collection of income taxes positively if substantial tax waivers and exemptions in the law are removed.

“I do not think every taxpayer pays tax. I do not think persons paying tax are paying their full share of taxes, and also I am not sure the systems KRA has put in place are working as they should,” says Robert Maina, tax expert at Ernst and Young.

The 2018/19 budget, which will be aligned along the government’s Big Four agenda projects —investments in affordable healthcare, housing, manufacturing and food security —for the next five years has doubled since 2013 when Rotich first read his Sh1.6 trillion budget under the theme ‘transformation for shared prosperity’.

The CS has already indicated that his spending plan will heavily lean towards the Big 4 Agenda with up to Sh460 billion set aside to roll out the projects.

“My Budget Statement will be a statement of emphasis on the Big Four agenda. We have aligned the budget to ensure that we provide resource towards the strategy,” he said.

Compared to his first budget in the 2013/14 financial year when he allocated Sh210 billion to the then newly devolved County governments and Sh108 billion to the Interior ministry to curb crime and reduce petty crime which was on the rise, a lot has since changed.

County allocations to counties have risen from Sh210 in the 2013/14 financial year to Sh372.7 billion in the next fiscal year coupled with Sh4.7 billion Equalisation Fund.

In the 2018/2019 financial year, Treasury finds itself between a rock and hard place, staring at runaway debt which has hit Sh4.88 trillion with interest and redemption payments for maturing debts totaling Sh870.6 billion in the next financial year.

Parliament’s Budget Allocation Committee report says these debt repayments have grown by Sh221.2 billion from the previous financial year and will account for approximately 50 per cent of total national domestic revenue for 2018/19.

But Rotich has already indicated preference of a 50 per cent borrowing ratio for both external and domestic borrowing a shift from the 57:43 per cent ratio, respectively, proposed in the medium term debt management strategy.

This could only be a pointer to a possible indication that Treasury could focus on domestic as opposed to external borrowing to drive growth.

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