Kenya will not raise its value added tax (VAT) to match the uniform rate for the rest of the countries in the East African Community (EAC), the Treasury has said, offering relief to households and businesses.
Treasury Principal Secretary Kamau Thugge on Tuesday said Kenya’s VAT on consumer goods would remain at 16 per cent despite calls to align the rate with the rest of the trading bloc’s members such as Tanzania and Uganda, which charge 18 per cent.
There has been growing concern that different rates at which member countries levy domestic taxes is distorting the EAC common market.
The Treasury’s decision to retain the current VAT rate has spared consumers an increase in the cost of commodities such as electricity, milk, newspapers, textbooks, fertilisers, alcohol, cigarettes, mobile phone handsets and airtime.
Global institutions, including the Washington-based Institute of International Finance (IIF) had tipped the Treasury to raise VAT to 18 per cent as a way of boosting revenues and arrest fiscal deficits that have seen the State take on huge loans.
The institute reckons that the increase would be in line with the Treasury’s quest to honour its commitment to the International Monetary Fund (IMF) in narrowing deficits.
Kenya pledged to slash budget deficits through spending cutbacks and raise tax receipts in exchange for a six-month extension of a Sh150 billion ($1.5 billion) stand-by credit facility from the IMF that was due to expire last month.
“Improving the VAT’s collection to five per cent of GDP (gross domestic product) can further cut the deficit by 0.6 per cent of the GDP,” the institute said in its report on Kenya.
“Furthermore, the VAT rate could also be raised from the current 16 per cent to 18 per cent, similar to the rates in Uganda and Tanzania.”
The IIF, which is a global association of the financial industry, also advocates a freeze in growth of public wages and salaries as yet another measure to lower budget deficits.
Budget holes have recently seen the Treasury embark on a borrowing spree, piling on debt stocks, triggering warnings from the IMF.
“The fiscal deficit in 2016/17 widened to 9.2 per cent of GDP (including grants) due to one-off effects and low revenue collection.
"Fiscal spending increased due to drought relief efforts and recent presidential elections. The two-stage elections cost a record $532 million (Sh53.2 billion), equivalent to 0.7 per cent of GDP,” the report says.
“Under the extended IMF stand-by arrangement programme, the authorities committed themselves to reducing the fiscal deficit to 7.2 per cent of the GDP in 2017/18, and to 5.7 per cent of GDP in 2018/19.”
The precautionary funds are meant to offer the economy a foreign exchange buffer against unforeseen external shocks.
Kenya, however, plans to impose VAT on previously tax-exempt products such as petroleum, which will start attracting a 16 per cent tax from September in efforts to boost tax receipts and reduce budget shortfalls.