Treasury Cabinet secretary Henry Rotich's budget on Thursday will likely hit households hardest through higher cost of some basic commodities as he hunts for cash to kick-start implementation of President Uhuru Kenyatta's ambitious Big Four Agenda.
Mr Rotich has budgeted for Sh3.074 trillion for the financial year starting next month, Sh454 billion more than the initial spending plan for the current fiscal period ending this month.
With headroom for foreign borrowing thinning by the day amid pressure from the International Monetary Fund (IMF) to halve budget deficit to about three per cent in four years, the Treasury has signalled a rise in taxation to grow domestic revenue.
Treasury is looking to net Sh1.743 trillion in ordinary revenue - taxes and non-tax income sources such as fees and commissions for various services - Sh253 billion more than the present year.
The Sh1.49 trillion ordinary revenue target for this year is likely to be missed given that only Sh1.094 trillion had been raked into the exchequer in 10 months through April, Sh396 billion short of the estimates with two months left.
"The performance of the revenue estimates for 2018/19 is contingent on ongoing reforms in tax administration primarily as a result of modernising VAT systems, reducing zero-rated products through the Tax Laws (Amendment Bill 2018 (and) tax base expansion through targeting nil and non-filers," the Budget and Appropriations Committee of the National Assembly says in the estimates for 2018-19 financial year tabled last week.
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Reclassification of foodstuffs
The proposed reclassification of some foodstuffs, medicaments and farm inputs from zero Value Added Tax (VAT) to exemption status is perhaps what is likely to hit households hardest if the National Assembly passes Tax Laws (Amendment Bill 2018 without changes.
The cost for basic commodities such as maize flour, ordinary bread and cassava flour, wheat or meslin flour, milk and cream without sugar concentrates and other sweeteners, farm pest control products and liquefied petroleum gas will likely go up.
Medicaments such as vaccines for human and veterinary medicines, raw materials to pharmaceutical manufacturers and supplies to marine fisheries and fish processors will also be affected by the proposed changes in the VAT Act, 2013.
Services such as transfer of a business as a going concern by a registered person to another registered person and supply of natural water - excluding bottled water - will likely also suffer an upward price pressures.
The shift from zero-rated VAT to exempt status will mean manufacturers and suppliers will not claim the 16 per cent VAT refund from the KRA for materials used in the making of those goods or provision of the services.
They are likely to pass on the increased costs to consumers to maintain their profit margins.
"The non-deductible input tax is factored in prices charged to final consumers making such supplies relatively more expensive compared to zero-rated ones," analysts at audit firm PKF said in a pre-budget report last week.
"Reclassification from standard rate of 16 per cent to zero rate yields a bigger price reduction for commodities compared to reclassification from zero rate to exempt status."
Mr Rotich will also be seeking a share of the cash from winnings from betting, lotteries and gaming activities through a proposed 20 per cent withholding tax, which firms will deduct from earnings by winners before paying them.
"We will wait to see how the government intends to implement this on the backdrop of administrative challenges previously encountered when it attempted to introduce withholding tax regime on winnings, especially on non-cash prizes," PKF tax consultants said.
Implementation of Excisable Goods Management System (EGMS) on products such as bottled water, juices, soda, energy drinks, other non-alcoholic beverages, food supplements and cosmetics is also likely to hit households hard.
This will see special stamps - which cost between Sh0.6 and Sh2.80 apiece depending on the product - affixed on those goods, thereby raising costs. The stamps will be attached physically as is the case with cigarettes, wines and spirits or through electronic codes as is presently done for beer.Activist Okiya Omtatah in March won a case challenging the rollout of the EGMS on above goods, but the taxman, who appealed the ruling, was on May 11 allowed by judges Asike Makhandia, Fatuma Sichale, and Kathurima M'Inoti to implement the system pending determination of the case.
The Treasury will also be seeking to ensure all suppliers of the goods and services to the national and county governments are tax-compliant as well as improve customs system and border control to reduce smuggling and under-declaration of imports.
"There are so many illicit, uncustomed, under-invoiced and counterfeit goods that enter our porous borders, especially through the port of Mombasa and the Eldoret (International) Airport," Kenya Association of Manufacturers vice chairperson Sachen Gudka said in an earlier interview late April.
Increased focus will also be on diversion of transit cargo from the port of Mombasa to land-locked countries such as Uganda, Rwanda and South Sudan to grow tax revenue.
Mr Rotich will, however, be seeking to incentivise companies operating in registered Special Economic Zones (SEZs) such as Athi River from compensating tax and capital gains tax, a move geared at attracting foreign direct investments.
Supplies into exclusive use in the construction of a minimum of 5,000 housing units or hotels or conference facilities by firms operating in SEZs will also be exempted from VAT in a bid to support affordable housing under the Big Four Agenda.