Capital FM (Nairobi)

13 June 2014

Kenya: Too Soon to Tell Impact of 2014/15 Budget - PWC

Nairobi — In its post 2014/15 budget analysis PricewaterhouseCoopers (PwC) found that there was too little information, as presented by Treasury Cabinet Secretary Henry Rotich on the floor of the National Assembly on Thursday, to assess its true impact.

Anne Eriksson, the PwC Country and Regional Senior Partner, East said the Finance Bill in particular was critical to fully appreciating what the budget meant.

"There's still a lot of information outstanding. We have yet to see the Finance Bill and other related bills that perhaps when we do have an insight into what those bills do have, we'll improve and update our analysis," she said.

PwC Director Steve Okello said it would be preferable, in order to avoid economic uncertainty, if the Finance Bill were released on the same day as the Treasury Cabinet Secretary made his presentation to the National Assembly, so they could be debated in tandem.

"It's of a concern to us as tax practitioners and to our clients why it cannot come out when the Budget Statement is being read because it could have some hidden surprises. So we're hoping that as we get used to this new Constitution, efficiencies in this legislative making process will improve," he said.

And as Eriksson mentioned, apart from the Finance Bill, the proposed amendments to the legislation on Excise Duty could also have some, "hidden surprises," in store.

"The reason maybe why no changes were made on the Excise Duty is because there's an intention to publish a new Excise Duty bill. So when that is published it might actually come with changed rates," Okello said.

But taking the 2014/15 budget at face value, as presented on the floor of Parliament, life for the 'common man' should get neither harder nor easier, Okello said.

"It's the same level of tax that you'll be paying in the next financial year so your level of disposable income won't be impacted. So if you're earning a hundred thousand shillings and the top tax rate for pay as you earn purposes is 30 percent you'll have Sh70,000 in your pocket this financial year and in the next financial year. So on average you'll be no worse than where you are," he explained.

But he was quick to add the disclaimer that there are factors beyond tax that impact the cost of living.

"It's impacted by inflation, it's impacted by the cost of petroleum, rainfall patterns could impact food scarcity because of the interplay between demand and supply and so on," he enumerated.

Still on the subject of unfinished business where the Budget was concerned, PwC Partner Rajesh Shah pointed out that the Executive was still yet to release regulations on the implementation of the VAT ACT, 2013.

"One of the comments he (Rotich) did make in his budget statement yesterday was that he's planning to have those issued. Hopefully it will ease compliance in terms of VAT. So we are actually waiting for those regulations to be published and to see how it's going to help taxpayers comply with the VAT," he said.

And given the Kenya Revenue Authority's proven success at widening the tax base, both Shah and Okello proposed that the Executive reduce PAYE and VAT to spur spending, generate more consumption tax and simultaneously spur economic growth.

"The Cabinet Secretary has the power to make changes to the rate but of yesterday he had not. This year tax revenue is going to increase by 22 percent. Next year they forecast that the tax revenue is going to increase by 17 percent. My hope is that KRA can continue to widen that net such that they can actually reduce the tax rates without losing revenue. If you can widen the tax net, it means that you can actually drop down the rates of taxes for Kenyans," Okello challenged.

Spending, Eriksson said, that should also be encouraged at the county level on development projects to allow for the full absorption and full benefits of the Sh226 billion allocated to the counties to be seen.

"A lot of the county governments are actually well placed to start spending. Not spending for wastage purposes but spending for development purposes cause that's the whole idea of the devolved government," she elaborated.

And in the spirit of optimal absorption of budgetary allocations, PwC Partner Simon Mutinda welcomed Rotich's announcement that the Executive was fully embracing e-procurement.

"Most often than not you'll find that there's a rush to spend budgetary allocations toward the end of the year," he said.

He also encouraged the Executive to dialogue with the Judiciary on the effect of protracted litigation on absorption of development funds as it was already doing on terrorism.

"It's just an issue of sensitisation at the beginning of the whole process. I think Kenyans are becoming increasing litigant. You can easily go to court to stop a big project from moving on so I think there's need for dialogue; public lobbying and also discussions with the Judiciary just like they did the other day on the issue of terrorism," Mutinda explained. READ: Laptops project in limbo as court suspends tender process.

The lease financing of hospital equipment, in addition to e-procurement, was another aspect of the budget Shah said was positive.

"Rather than buying equipment certainly in the health sector it's increasingly looking at leasing them. That means rather than paying something one off, in a particular year, they're actually going to spread that expenditure during the life of that equipment," he explained. READ: KNH, Moi Referral get chunk of health funding.

Other than for procurement and the heath sector, Shah and Okello also felt that the 2014/15 budget bore good tidings for the mining sector.

"They will only be taxed if they make a profit on the disposal. Simple example, I buy this microphone at Sh100 and I sell it to Rajesh for Sh200, I should pay tax on the Sh100 profit I've made. Previously, I would buy it at Sh100, I dispose it to Rajesh at Sh100, I'm not making any profit but I'll still be required to suffer tax on the Sh100 I've used to buy the asset," Okello explained.

But even then, Rajesh said, "the devil would be in the details of the Finance Bill."

And until then, Eriksson said, it was a wait and see sort of situation, "we really believe that the nearly Sh1.8 trillion budget is a fair one and if in fact it is delivered in the way the government has said it intends to, it will perhaps get us to where Kenya needs to be from an economic stand point."

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