The Sh3 trillion 2018/19 budget was the largest, both in Kenya’s and the region’s history. There were two main proposals that had a direct impact on the economy both in terms of the fiscal direction and the cost of living. The introduction of presumptive tax and “introduction” of Value Added Tax (VAT) on specified petroleum products.
Under the presumptive tax regime, tax is charged at 15 per cent of the single business permit fee issued by county governments. The aim was to expand the tax base by bringing the informal sector into the tax net.
It is not easy to determine the impact of the new tax regime on the economy because of administration challenges. Presumptive tax leverages on the county government resources to enforce collection, through confirmation of its payment on iTax before issuing a business permit. The tax increased the cost of doing business. The other fiscal measure was the “introduction” of VAT on petroleum products.
One of the notable changes the Act introduced was the exemption of specified goods on a transitional period of three years, expiring in September 2016. On September 21, 2018, the President assented to the amended Finance Bill 2018.
Among the new provisions was a reduction of the rate of VAT on petroleum products from 16 per cent to eight per cent.
It was believed that VAT on petroleum products would negatively affect not only businesses but also raise the cost of living for Kenyans.
The belief then was that by charging VAT, businesses, especially manufacturers would be subjected to an increase in the cost of transport and energy, among other overhead costs. While the introduction of the VAT initially depressed sales for the industry, the impact appears to be evening out with most dealers experiencing an upswing in sales.
The industry players can now enjoy the input credits incurred in making purchases for their business, which offers a significant reduction in their cost base. The consumers are however, not as lucky as they bear the brunt of the cost increase.
This tax, without a doubt, contributed to the increase in inflation. Transport is a basic need, and fuel runs it. It is safe to say that overall, the average citizen has experienced a significantly higher cost of living as a direct result of fiscal measures implemented by the Government in the 2018/19 budget. – The writer is a Senior Advisor in Tax & Regulatory Services Department at KPMG Advisory Services Limited [email protected]