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Financial News

Pressure from the IMF to tax all essential goods in Kenya seems to be getting to President Ruto

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According to a report by Business Daily, a Kenyan news publication, Njuguna Ndung’u, Kenya’s treasury secretary relayed plans to stop the zero-rating of value-added tax (VAT) on the supply of several products including maize flour, cooking gas, ordinary bread, medicaments, agricultural pest control products, and animal feeds.

Essential supplies, inclusive of locally assembled mobile phones, motorcycles, electric bicycles, solar batteries, and electric buses which are currently VAT zero-rated, are not exempted from this new proposed taxation laws.

According to the report, the draft Medium Term Revenue Strategy will come into effect by July 2024, and “zero-rating for VAT purposes will be restricted to the export of goods and services, while exemption will apply to goods in the raw state.”

The complete implementation of the IMF-backed revisions that revamped the VAT Act in 2023 will coincide with the introduction of extensive modifications to consumption tax regulations.

For roughly a decade now, the International Monetary Fund has advocated for the Kenyan government to tax all goods, while simultaneously providing social assistance programs to cushion the effects for vulnerable households. The new fuel VAT hike in East Africa’s largest booming market is an extension of this reform.

“First Schedule (exemption) and Second Schedule (zero-rating) to the VAT Act will be reviewed to rationalize the exempt and zero-rated supplies and align the VAT system to the destination principle as well as other international best practices,” Prof Ndung’u wrote in the draft revenue strategy.

“The review shall limit zero rating to exports and remove all VAT exemptions except for unprocessed goods.”

The Kenyan government has reassured its people that it would “develop an appropriate strategy to address the tax burden on essential goods and services.”

The treasury noted that the policy on zero-rating and exemption in the VAT tax system has so far been counter-productive to the government’s goal of maximizing its revenue generation, with collections underperforming potential by nearly 40%.

The Treasury also estimated that in 2022 alone, tax concessions on domestic VAT, paid by traders with annual sales of more than Sh5 million, dropped to Sh211.94 billion in 2021 from Sh234.38 billion in 2020.

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