President William Ruto is facing a backlash after the opposition highlighted that he was shifting some essential goods from the zero-rated category to tax exemption, which may increase the cost of the affected products.
Zero rating and tax exemption are two different ways the government can treat goods and services in value-added tax (VAT) to stimulate economic growth.
Speaking to Kenyans.co.ke, Economist Brian Wachira explained that zero rating means the government does not charge Value added Tax on selling a good or service.
However, businesses that sell zero-rated goods or services can still claim credit for the VAT they paid on the inputs they used to produce the goods or services.
"This means that the overall cost of producing and selling the goods or services is reduced, which can lead to lower prices for consumers.
"Tax exemption means that the government does not charge VAT on the sale of the good or service, and businesses that sell exempt goods or services cannot claim a credit for the VAT that they paid on the inputs that they used to produce the goods or services," Wachira explained.
According to Wachira, the interventions mean that the overall cost of producing and selling the goods or services is not reduced, which can lead to higher prices.
Whether to zero rate or exempt a good or service is a policy decision made by the government after considering several factors, including the economic and social importance of the good or service.
"In some cases, the government also considers the impact taxing the good or service would have on prices, affordability and the competitiveness of businesses in the country.
"In this context, the government is more likely to zero-rate goods and services that are considered to be essential, such as food and medicine," Wachira explained.
John Mbadi Highlights Commodities Set to be Exempted From Tax
Nominated Member of Parliament and Certified Public Accountant (CPA) John Mbadi, on Thursday, June 8, weighed in on the ongoing debate over the Finance Bill 2023, which advocates for some commodities to be tax exempted.
"On the issue of Value-added Tax, the Finance Bill 2023 proposes that several basic commodities be removed from zero-rated to tax exemption.
"The government is doing this simply because they do not want to pay tax refunds to the producers and businesspeople who deal in the essential commodities," Mbadi explained.
According to Mbadi, the government's plan to cut down on tax refunds informed the decision to shift the products from zero-rated to tax-exempt.
"A commodity will become more expensive when it is removed from zero-rated to tax-exempt. In the Finance Bill 2023, the government proposes removing maize flour, cassava flour, pharmaceutical products, fertiliser, pest control products and sugar cane transportation from the farms to the factory.
"As a result, we will see the cost of our sugar going up dramatically immediately after Finance Bill 2023 comes into effect. They have been complaining that our sugar is not competitive because we produce it expensively. Still, it's even going to be more expensive," Mbadi explained in an interview on Citizen TV.
Goods and services that are exported may also attract either tax exemption or zero-ration, as this can help to make the country's exports more competitive.
The government is also likely to exempt goods and services considered luxury goods or services that are not essential, especially those provided by non-profit organizations.
Businesses that sell zero-rated goods or services may be able to pass on the savings to consumers in the form of lower prices. However, businesses that sell exempt goods or services may have to pass on the full cost of VAT to consumers, which can lead to higher prices.
Mbadi further wondered why President Ruto did not live up to the promise of dealing with budgetary deficits as he promised during the August 2022 Campaigns.
"When President Ruto came to power, he promised to reduce Uhuru's budget by Ksh300 billion. He not only managed to reduce it and instead increased it by Ksh410 billion.
"The government has increased expenditure and thinks that the best way to finance that increase is to overtax Kenyans. And I dare tell you that your projections on revenue are completely out of place. There is no way you are going to collect about Ksh.698 billion more in this country," Mbadi claimed.
Mbadi's sentiments were shared by Economist Kwame Owino, who observed that the government does not have a tax problem, but expenditure challenges.
Kwame, the CEO of the Institute of Economic Affairs (IEA), explained that expenditure should be matched with economic items that are sustainable both in the short and long term.
"When the government picks one item, then multiplies its cost by around five times, that is not an expenditure that is wastage and corruption," Kwame explained.
Kwame advised the government to consider cutting expenditures by reducing government programs and freezing or trimming spending on existing programs.
"However, it can also lead to cuts in services that are important to citizens. This is a temporary solution, and it can lead to a spiral of debt that is difficult to escape," Kwame stated in an interview on Citizen TV.
