Budget: Analysts read between the line

June 12, 2009
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, NAIROBI, Kenya, Jun 12 – Analysis of the 2009-2010 budget presented by Finance Minister Uhuru Kenyatta on Thursday indicates that some sectors and individuals may have looked like gainers but in actual fact they are not.

PricewatehouseCoopers Tax Partner Steve Okello says the announced exemption of Value Added Tax (VAT) on mobile phone handsets may not make them cheap as many had initially thought.

“Zero rating a commodity and exempting it from VAT are two different things and the repercussions too are very different,” Mr Okello said.

Zero rating means for the affected commodity value added tax (VAT) is not paid by the final CONSUMER but on the supplier can recover VAT for his inputs. However exemption from VAT means organizations that supply exempt goods or services are unable to recover the related input VAT.

Okello therefore concludes that those trading in mobile phones would still pass on the VAT charges they incurred to the consumer. “If the Minister intended for mobile handsets to become cheaper for the masses he should have zero rated them.”

Mr Okello further points out that while that this year’s budget is an expenditure oriented one with the Minister expecting the Kenya Revenue Authority (KRA) to raise most of the funds, he is not very optimistic that this will be the case.

“Though KRA has been doing a good job in the last three to four years, the environment for enhancing tax revenue is not there since most big companies have been announcing a drop in profit,” he said.

On the issue of the harmonisation of VAT for the region which currently stands at 16 percent in Kenya but 18 percent for Uganda, Rwanda and Tanzania, Mr Okello noted that something would have to be done in the next two years because of the ongoing  tax harmonisation process for the East African Community (EAC).

“Tanzania dropped its VAT rate to 18 percent from 20 percent while Rwanda increased to the same 18 making Kenya and Burundi the odd ones out. I only hope that when it’s decided what the rate will be for the region, that it will be at the lower rate of 16 percent,” he said.

On the other hand, Mr Kenyatta proposed tax exemptions on people with disabilities earning up to Sh150,000 but did not include this proposal in the Finance Bill.

“This proposal was captured in the Persons with Disabilities Act but not in the Finance Bill so I don’t know whether it was a typing error or what,” the Tax Partner observed.

Speaking at the same forum, PWC Country Senior Partner Kuria Muchiru noted that whilst the Minister seemed to have channelled most of the funds through the Constituency Development Fund, it does not mean that constituency representatives will directly run this funds.

Mr Kuria explained that the funds and projects will be run in conjunction with the line ministries something that should make them more effective.

He however expressed concern that the bigger issue would be how to monitor and make both the line ministries and the individuals running the Constituency Development Funds more accountable.

“Its one thing to say, but how exactly would it happen is the question that most of us are left asking,” Mr Kuria observed.

Mr Kuria noted that plans by the government to borrow Sh109 billion may not necessary raise interest rates and inflation in the country.

“As long as the Treasury has good procurement plans which will increase the absorption capacity of the funds, this action could stimulate growth in the country,” he said.

The team of auditors has described the budget as bold, daring and refreshing and whose biggest challenge would be to achieve the goal of devolution as intended by the Finance Minister.
 

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