Tired of the skyrocketing cost of living? The fault of your deputy

Joint parliamentary session in Nairobi on Wednesday May 5, 2021. [David Njaaga, Standard]

The recent record rise in prices at the pump has shocked Kenyans.

The increase was a double whammy for many people who were already worried about losing their jobs due to the coronavirus pandemic, while others had to endure pay cuts as companies struggled to stay afloat.

Many believe the government has made the cost of living unbearable by hitting petroleum products and a myriad of consumer products with punitive taxes.

Members of Parliament, who are keen to be re-elected next year, have shown compassion for angry Kenyans, condemning the national government for the current crisis.

While looking for ways to reduce the cost of fuel, lawmakers have declared the petroleum development tax on diesel illegal.

They also want a review of the costly deals Kenya Power has signed with various independent power producers.

However, critics say it’s nothing but a campaign gimmick, with most lawmakers keen to be re-elected in next year’s polls.

MPs, led by Garissa Township MP Aden Duale, who was majority leader when the levies were passed in the House, criticized the government for “overburdening mwananchi with taxes.

Most of the taxes, if not wasted on white elephant projects, have been used to pay down debt, leaving very little for development.

But experts insist that Mr Duale and many other MPs now throwing blows at the government have overseen the widening budget deficit and the accumulation of taxes by blindly approving all of the executive’s proposals.

Now Duale, who along with Vice President William Ruto formed a splinter group within the Jubilee Party, insists that the responsibility ends with the President.

He said that even after the National Assembly rejected the increase and introduction of the 16 percent value added tax (VAT) on oil, President Uhuru Kenyatta used his powers under the article 115 of the Constitution to quash the decision.

“This president is using his powers to make innocent con artists suffer and this House cannot sit and wait,” said Duale.

While Uhuru has occasionally vetoed Parliament’s decision, Kenyans have not lost sight of Parliament’s rallying to controversial laws introduced by the executive, resulting in the current economic mess.

MP Aden Duale. [File, Standard]

Robert Waruiru, senior tax director at KPMG East Africa, said it was the role of MPs to make laws.

“If the executive makes a proposal that doesn’t make sense, then ideally they’re the ones who are supposed to push back,” he said.

The executive may be the one who makes a spending plan and how to finance it, but since under the current constitution the Cabinet Secretary of the National Treasury is not a Member of Parliament, the House assumes the role to develop the budget.

This, Mr. Waruiru noted, means that deputies through the Parliamentary Budget Office and the chairman of the departmental finance committee are the ones proposing all motions.

“If we have a problem from a tax point of view, it is squarely on the deputies,” he said.

Kenya’s desperation to repay its debts – where 65 shillings out of every 100 shillings collected in tax is used to pay off domestic and foreign loans – saw it come up with new taxes such as the digital services tax (DST ) and the minimum tax which was recently declared unconstitutional.

The Kenya Revenue Authority (KRA) has announced that it will appeal the High Court’s decision to remove the tax.

Nikhil Hira, tax adviser and director of Bowman’s Coulson Harney, said that in addition to the 8% VAT on fuel, other punitive taxes included the tax for railway development, the tax for petroleum development and inflation adjustment for excise taxes.

“Most of them are indirect taxes, it’s not income tax,” Hira said. “Certainly what they haven’t done is change the income tax laws.”

But he says that overall, Parliament has the power to reject oppressive taxes.

Another tax expert noted that there has been a deterioration in the quality of lawmakers.

“They might just not understand what they are pushing through the finance law,” said the source, who requested anonymity for fear of reprisal.

“But MPs have the option of calling in experts and asking them to explain the proposals.”

Central Bank of Kenya (CBK) Governor Patrick Njoroge has warned that if left unchecked, the country could easily default on its debt obligations.

The governor of the CBK, Patrick Njoroge. [David Gichuru, Standard]

Kenya’s debt stood at 7.7 trillion shillings at the end of June.

And the budget deficit – or the difference between taxes collected and expected spending – continues to widen, meaning the Treasury will continue to borrow to fill that hole.

But when did the rains start to beat the country?

Ken Gichinga, chief economist at think tank Mentoria Economics, said there is a relationship between high taxes and growing debt.

“For someone to understand our tax journey, they need to understand our debt journey,” he said.

He noted that when Kenya first launched the Eurobond in 2014, there was very little understanding of the debt instrument in the country.

“At that time, it is possible that even within Parliament there was not a very clear understanding of Eurobond,” said Mr Gichinga.

The argument at the time was that because Kenya had become a middle-income country, the Eurobond would link it to the global credit market.

“I think at that time the surveillance might have been weak,” Gichinga said.

Then the tension came in 2015, with the first charge on the Exchequer being on debt.

“This means that whatever income you get, creditors are always protected,” Gichinga said, adding that this could explain why Kenya’s bond issues have always been oversubscribed.

From that point on, the government began to aggressively plunder the pockets of taxpayers by proposing a myriad of taxes.

The introduction of VAT on petroleum was made in 2013, but the National Assembly will delay its implementation by several years.

But with the 2017 election behind them, lawmakers gave in.

Also under the VAT law of 2013, the government had introduced a law that would significantly reduce the number of goods and services previously exempt from tax.

The state had proposed to impose a 16 percent VAT on essential products, including bread, rice, corn flour and milk.

Regarding income tax, the government is now moving towards a digital economy that is difficult to tax. [File, Standard]

However, after growing opposition from civil society groups and MPs, the law was revised to exempt bread, rice, milk, wheat, infant formula, corn flour, first aid, vaccines, dressings and sanitary napkins.

“You are in a place where you have to fund your expenses as a government, but you don’t collect enough taxes. The thing to do is to hug people; for example, VAT on fuel, ”Waruiru said.

He added that while the government may not have introduced many new taxes under the current administration, it has extended the excise tax – or what was known as the sin tax – to products such as financial services, airtime and betting, and not just harmful or luxurious products.

“Traditionally, excise taxes have been on beer, alcohol and cigarettes,” Waruiru said.

VAT was also charged on products such as airtime and gasoline. VAT is also paid on amounts subject to excise duty.

Regarding income tax, the government is now moving towards the digital economy that is difficult to tax by offering taxes such as DST and the activation of the turnover tax on small businesses.

It also activated the turnover tax for small and medium-sized enterprises (SMEs).

Gichinga said the fact that the economy is not doing well has not helped, with alarm bells starting to ring in 2017.

Draconian measures

In 2018, the International Monetary Fund (IMF) severed ties with Kenya after the country exceeded its debt sustainability ratios.

And with the economy pushed into the red by the Covid-19 pandemic, the Washington-based institution has devised some of the painful new policies in a bid to help Kenya close its budget deficit.

“In a weak environment, the income needed to service this debt is not there. And that is why you see that the government has applied draconian measures, ”Gichinga said.

However, it looks like the Jubilee administration started off on a bad foot, with the belief that its mega-projects would spur growth.

“The thought within government circles has been that this is what drives the economy,” Gichinga said.

But the point is, it’s businesses that make the economy run.

“I don’t even think it’s because people don’t understand that. I just think when it comes to government tax expenditures there are too many opportunities for bribes, ”Gichinga said, citing land compensation for the railway track project. standard (SGR) as an example.

Standard gauge railway (SGR) at Voi terminus. August 2021. [Elvis Ogina, Standard]

As for monetary policy, he said, it’s hard to have a corrupt environment because it’s about setting interest rates and making sure banks lend to businesses.

Indeed, some experts believe that the out-of-control spending that started in 2013 has little to do with the economy but more with politics.

Uhuru and his ex-deputy Ruto have taken the reins of power with charges from the International Criminal Court (ICC) hanging over their heads.

As a result, the new government made the fight against the ICC its main focus in the early stages, according to John Githongo, activist and former anti-corruption leader, in a previous interview with The Standard.

“They lost control of the corruption at that point. It was a free-for-all, ”Githongo said of the bad spending habits taking hold.

Suddenly the bidders – a new generation of opportunistic brokers who cashed in on government contracts – flourished. Project costs have been inflated to offset bribes, he said.

Tax integration

But there have also been some good tax proposals over the past eight years.

This includes the consolidation of tax procedures under the Tax Procedures Act.

“It’s a good idea because instead of having the income tax procedures, the VAT procedures, the customs procedures, all of this is consolidated into one,” KPMG’s Waruiru said.

“It simplifies the cost of doing business, because then you all comply with one procedure. ”

There is also the Tax Appeal Tribunal Act, which came into effect in 2013.

The first tribunal was established in 2015.

“The law is becoming more and more complex. A tax policy, which the government is currently working on, will ensure the safety of businesses, ”Waruiru said.

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