Kenya Plans to Re-Introduce Legislation to Remove Tax Exemptions

The Kenyan government plans tomorrow to re-introduce legislation that lawmakers rejected last year for removing value-added tax exemptions on processed food and other goods, Treasury Secretary Henry Rotich said.

“There are over 300 exemptions which means too many refunds, which makes administration of the tax cumbersome,” Rotich told reporters today in the capital, Nairobi. “Maintaining an exemption does not necessarily benefit the poor which it is supposed to.”

Kenya is trying to boost revenues to help finance increased spending on infrastructure development that will help spur the economy, including a rail line from the port of Mombasa to the Uganda border and geothermal-energy production.

In addition to the VAT law, Rotich announced plans in the 2013-14 budget statement to introduce a 1.5 percent levy on imports for a new Railway Development Fund and re-enact a capital gains tax starting with real-estate transactions.

Income from the VAT, which is applied at a rate of 16 percent, has fallen to 5 percent of gross domestic product from as much as 8 percent previously because the number of businesses with tax-exempt status keeps growing, Rotich said.

The International Monetary Fund, which supported the review of the tax system as part of a three-year loan program, said the proposed legislation will help boost efficiency.

Below Potential

“If one looks at Kenya’s tax revenue performance, one sees that income tax represents about 50 percent of tax receipts, while VAT only represents about 25 percent,” Ragnar Gudmundsson, the IMF’s representative in Kenya said in an e-mailed response to questions June 25.

“This is unexpected in an economy like Kenya’s, where the informal economy plays an important role,” he said.

The proposed legislation was rejected by legislators in December because they wanted items including food, fertilizers, seeds and sanitary towels zero-rated, the Business Daily newspaper reported, citing a parliamentary committee.

“This time we will sensitize the public more about its benefits and intentions,” Rotich said.

The Consumer Federation of Kenya is planning to protest outside government buildings tomorrow against the draft legislation, which it says would increase the cost of living.

“Removing exemptions will definitely have an upward effect on prices because producers will transfer that burden to consumers,” Joseph Thogo, a Dar es Salaam-based senior manager on tax at Deloitte Tanzania, said by phone today.

Kenya is the world’s biggest exporter of black tea and it supplies a-third of all flowers traded in Europe.

The government of East Africa’s largest economy estimates growth will expand 5.8 percent this year from 4.6 percent in 2012. About 46 percent of Kenya’s 42 million people live in poverty, according to the World Bank.