The Treasury is targeting producers of products like milk, bread and maize flour in a tax review that would deny the firms billions of shillings in refunds and keep the retail prices of the commodities unchanged.
Treasury Cabinet Secretary John Mbadi is proposing to move select commodities from a list of goods that are VAT [value added tax] zero-rated to exempt categories.
Under zero rate, firms are allowed to seek refunds from the Kenya Revenue Authority (KRA) for VAT they pay on inputs like electricity, fuel and raw material.
For exempt, they are not allowed to claim the refunds, which often sees the producers pass on the VAT on inputs to consumers.
Mr Mbadi reckons that producers have abused the refunds model by not transferring the benefits to consumers, arguing they have been enriching themselves from the reimbursements.
“[If] there is something I’m passionate about it is tax expenditures (refunds). There are commodities which we are cushioning Kenyans for, like bread. The mistake for what was done in my view is to propose the taxation of bread at 16 percent which is not very good for the consumer. We need to remove bread from being zero-rated to exempt,” said Mr Mbadi at a press briefing.
“I know many people say that zero-rated is cheaper than exempt and I agree, but the benefit is never passed to the consumer. The worst part is when you allow those zero-rated commodities, these guys will come claim money that they shouldn’t even claim. You will hear some say that you should not even employ bakers but rather employ accountants to cook your books and go to KRA to get their money.”
About 30 goods and services are under the list of zero-rated VAT products, including ordinary bread, maize flour and milk.
Others are agriculture pest control products, transportation of sugarcane from farms to milling factories and raw materials supplied to pharmaceutical manufacturers in Kenya.
Brookside Dairy, New Kenya Co-operative Creameries, Bio Foods Products, Broadways Group and Kenafric Bakery are among the largest manufacturers of processed milk and ordinary bread.
VAT waiver on goods and services meant for exports is not regarded as a tax expenditure on the exchequer.
Tax forgone from zero-rating that was due as refunds rose from Sh98.4 billion in 2021 to Sh119.9 billion in 2022 or 1.86 percent of GDP.
The growth was partly attributed to the introduction of new items to the waiver list through the 2021 and 2022 Finance Acts, say Treasury documents.
Mr Mbadi said he would retain goods meant for exports in the VAT zero-rated list.
This is in line with the present tax policy that advocates inclusion of export goods in the VAT zero-rated list to make locally produced products cheaper in the competitive global market.
Changes to the list of zero-rated goods and services are part of the broader plan to review the VAT Act over the medium term to seal tax loopholes.
The new tax expenditure or refunds model seeks an analysis of the benefits of tax waivers is done before the approval to forgo VAT on goods and services.
“In principle, tax incentives and exemptions are economically inefficient, inequitable, add to the complexity of the tax system and reduce revenue yield,” the National Tax Policy says.
The review of the VAT classification on refunds for the key consumer commodities follows the withdrawal of the Finance Bill in the wake of deadly protests over new taxes.
The scrapping of the proposed tax hikes after the collapse of the Finance Bill left a Sh345 billion funding hole and resulted in spending cuts.
The review of the VAT classification is set to boost State coffers by reducing the tax expenditures or refunds.
The Treasury also has a window to introduce new taxes ahead of the Finance Bill, 2025, which will be tabled from April next year.
Last month, Mr Mbadi sought suggestions from the public on new legislation to boost revenues and tackle other economic challenges.
The submissions closed on October 4, 2024, and are currently under the review of the Treasury, which is also betting on the widening of the tax bases and a clampdown on tax cheats