Minimum VAT set at 12% and tax review carried out every five years

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Economy

Minimum VAT set at 12% and tax review carried out every five years


Treasury building in Nairobi on June 11, 2020. PHOTO | SILA KIPLAGAT | NMG

The Treasury is seeking to set the minimum value added tax (VAT) rate at 12%, paving the way for higher taxes on goods such as fuel and cooking gas if the proposal is passed.

The draft National Tax Policy proposes that all goods be taxed at 16% and the prime rate not lower than 12%.

He wants tax laws to be reviewed every five years to make the tax system predictable and make the country an attractive investment destination.

Currently, taxes are reviewed annually through the finance law amid protests from businessmen over the frequent changes.

“Kenya’s tax policies are broken down into various tax laws, which are amended every year during the national budget process,” the draft policy states.

“Frequent changes in tax laws lead to unpredictability and inefficiency in tax administration. This creates distortions, which impose additional costs on taxpayers and the tax administration.

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The Treasury has said that charging less than 8% VAT on goods such as fuel creates an unfair advantage over other products taxed at 16%.

The policy comes amid pressure from the International Monetary Fund (IMF) to double VAT on all petroleum products to reduce the budget deficit and rein in government borrowing.

President Uhuru Kenyatta was forced in 2018 to halve fuel VAT to eight per cent after the introduction of the full tax sparked protests from motorists and business lobbies.

The Treasury last week halved the VAT on cooking gas, giving consumers major relief amid rising global prices for raw materials and other petroleum products.

“In 2020, there are two general VAT rates: 8% for petroleum products, 16% for other goods/services and 0% for exported goods. The rate on petroleum products creates unfair advantages over other products,” the draft tax policy states.

“There will be a single general rate for VAT and where a preferential rate is granted it will not be less than 25% of the general rate,” the policy says.

Taxes, including VAT, import declaration fees, road maintenance, oil development, oil regulation, railway development, anti-adulteration and merchant shipping levies account for 40% of retail fuel prices.

For every liter of petrol retailed at 159.1 shillings, the government collects 11.12 shillings in the form of VAT charged at 8%.

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By raising the minimum rate to 12%, the tax authorities will collect 16.6 shillings on every liter of petrol, or an additional 5.48 shillings per liter based on current pump prices.

The IMF estimates that Kenya should impose a 16% VAT on fuels from the current 8% when crude oil prices fall, signaling that the fund is open to delayed implementation to hedge against anger and frustration. growing public pressure in the face of soaring oil prices in the country.

Pump prices are selling at record highs due to expensive crude oil.

“If necessary to meet fiscal targets, capitalize on lower fuel prices by aligning fuel VAT at the standard rate,” the IMF told the government in an earlier advisory.

The IMF advice comes on the back of its multi-billion shilling loan facilities in Kenya where money is flowing directly into the budget to supplement the public purse.

The record high prices of super petrol and diesel in Kenya have increased the pressure on households because the cost of energy and transport have a significant weight in the basket of goods and services which is used to measure inflation in the country.

Producers of services such as electricity and manufactured goods will also factor in the higher cost of oil, triggering price pressure across the economy with ramifications for measuring the cost of living.

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The majority of Kenyans depend on kerosene and gas for lighting and cooking, making the price of crude oil a key determinant of the rate of inflation.

The economy also uses diesel for transport, power generation and the operation of agricultural machinery such as tractors, with a direct impact on the cost of agricultural products.

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