Let’s face it – VAT Act 2013 is shutting down businesses

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By Betty Maina

Mr Kariuki has a thriving pig business. Or more appropriately – did. He is one of nearly 1000 farmers contracted by a local meat processor. He has more than 200 pigs in his farm and has a regular supply contract with a local meat processor who serves the local and regional market.

Now he is reviewing his options and thinking of what to do with his farm as the pig business has suddenly become 16 percent more expensive as result of the VAT Act which included animal feeds in the Vatable Category. He has decided to send the mature pigs to slaughter and not serve his Sows. So he will not have a new round of Piglets for the foreseeable future.

Mama Masika, a thriving poultry farmer, is in a similar situation. On September 15 once the import of the VAT Act sunk in, she suddenly decided not to take in her order of 3,000 day-old chick she had booked at the local hatchery for the same reason – much to the chagrin of Mrs Koech who has had to contend with cancelled orders the whole month. Reason – Chicken feed now attracts 16 percent VAT and she has no way of claiming it back – especially as she reads that the KRA takes more than two years to refund others who qualify.

Her costs of production were already quite high leading to retail prices of more than Sh400 per Kg if she wanted to make some money. It seems absurd to her that the Government of Kenya decided to add 16 percent to her costs. She is now scouting for a supplier of chicken from Brazil. Her analysis shows that she can land a capon from that Latin American Country in Kenya for $1.60 (Sh138). And Kenyans will always eat chicken – so she should have good business still.

The same case applies to Industrialist Shah who manufactures generic pharmaceutical products and supplied the Ministries of Health not only in Kenya but also the region. He has had to contend with cancelled orders when he advised his clients of the price changes he has had to effect following the new VAT Act which makes medicament VAT exempt.

He has now given notice to some of his 300 workers given the downturn in the business. He left on Sunday evening to look for suppliers of the same line of generic drugs from India as he would like to remain in the same line of business but it is now cheaper to import the same generics from India than produce them in Industrial Area. He has been one of the thriving generic medicines manufacturers supplying the requirements of countries in COMESA. They have been an inspiration for colleagues in the continent and sharing insights with others as far as Burkina Faso.

At the Airport he met Bwana Thomas armed with designs of the machinery he has been producing in Kariobangi. Bwana T is a manufacturer of agricultural implements who now finds that with the change of his inputs from Zero Rated to Exempt status, he fears his customers will not pay the new prices. He was on his way to China to find a factory to manufacture his designs and ship them back to him in Kenya.

These decisions have all had to be made in the wake of the VAT Act 2013. Local manufacturing companies are beleaguered from all sides and since the introduction of this law have lost an incredible number of orders. In addition to the heavy tax burden imposed on them. There is corporation tax, VAT, county levies and a host of other fees and charges, high electricity tariffs and so on.

The VAT Act is leading to exportation of jobs from Kenya and it is time for the Government of Kenya to urgently review the unintended consequences of a law that was intended to streamline VAT operations not shut down businesses. But that is what is currently happening.

While the VAT Act simplifies tax administration by and large, the impact of making many products tax exempt rather than zero rated was not fully appreciated by both the National Treasury and Parliament.

The Act distinguishes between taxable supplies and exempt supplies and only has two VAT rates – 0 and 16 percent. The first schedule of the Act lists exempt supplies and the second schedule tackles Zero Rated supplies. Goods are only zero rated when they are supplied to the entities listed in the schedule.

The final Consumer price changes depending on how the good is categorised. If a good is zero rated, the company can claim VAT on supplies of the good so the selling price is lower. If the good is exempted, then the company cannot recover input VAT which is converted into a cost for the company. The difference in price of a good that is exempted and a good that is charged 16 percent VAT is negligible. But the biggest problem is that companies that sell exempt supplies have no mechanism to claim back VAT while those under the 16 percent VAT category do.

Unfortunately, for several local manufacturers, especially those in the Pharma sector and the Plant and Machinery, a large number of goods now fall under Schedule 1. Unable to claim VAT payable on inputs, these manufacturers are forced to increase their prices to recover VAT already paid. When the prices of locally manufactured goods increase, people automatically turn to cheap imports which come at a lower price making our goods uncompetitive.

This negates President Kenyatta’s vision of deepening manufacturing in Kenya and expanding our exports. The VAT Act 2013 has since September been doing the exact opposite. Instead of expanding in Kenya, as I write, the jobs in this sector are currently being exported. Now, to get this back will be an uphill task.

If the situation reverses today and becomes more tenable, it will take Mr Kariuki at 12-15 months to get his pig business up to where it was in May 2013. Once Mrs. Masika establishes a regular supply from Brazil which meets all the regulatory requirements, it will take a mountain for her to restart her poultry business – VAT or no VAT – it was a strain anyway. Once Kenyan consumers get used to buying chicken at Sh200 they will not be patriotic enough to buy local produce at more than Sh450! As for Bwana Thomas and Industrialist Shah, it will take several years before they restart full scale production in Kenya once they shut down.

From the president’s statements it is clear that the Government intends for Manufacturing to be the key to industrialisation. But it needs long-term commitment. Recent research shows that manufacturing has a structurally transformative effect on economies and a spillover effect on other sectors in a country. Manufacturing is a key contributor to sustained job creation and GDP growth.

In 2012, forty percent of Kenyan exports were of locally manufactured goods while Chinese and Korean exports of the same were about 93 percent. Kenyan industry has capacity to rise up and deliver the President’s vision if supported by a conducive environment. The actions of Government in the last three months to streamline the operations of the Port of Mombasa and the Northern Corridor as well as the plans to deliver cheaper energy within the next few years are very welcome and will go a long way to enhance our competitiveness.

However, with this rosy future beckoning, by the time it arrives, we could have lost major sectors like the Pharmaceutical and Machinery sectors just because of the folly of VAT Act 2013. We must not allow mistakes that can be corrected to strangle businesses with promise and a future. We have a duty to safeguard existing employment rather than hope we can create some in future or reverse preventable losses. Every job counts and should not be casually lost and labelled collateral damage.

(The writer is the chief executive of Kenya Association of Manufacturers and can be reached on [email protected])

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  • Honest Kenyan

    This is a biased lobbyist article. Manufacturers, like everyone else must pay taxes, instead of cheating cheating the rest of us to subsidize them via all manner of tax exemptions. Everyone pays 16% – we have a broader and fairer tax base The key is to become more efficient – as efficient as your competitors out there – which will result in overall economic growth and development. So, close down the business if you will, others who can run theirs better will soon take your place! – which is all the better for the common good.

    • DavidPkemoi

      But Mzee Kibaki never raised any taxes for kenyans, instead he zero-rated farm implements and inputs and removed taxes on food so that almost every kenyan could afford. His development record supursed even Moi’s. This so called digital leadership is A FARCE. It will only breed resentment. They are reversing the gains attained by Mzee Kibaki by introducing unnecessary taxations especially on consumer goods. The KAM leadership is only painting the grim picture of reality.

      • Rut_o

        Were they (KAM) not complaining of a complex tax regime? Now it has been made simple what the problem? Why should chicken from brazil be cheaper than just local produced. Something must be wrong with our production line

        • Brian

          Yes something is wrong with our production line… the cost of inputs ie chicken feed is now up by 16 % thanks to the VAT!

    • Brian

      As per the article, I see those that are hurting most are small scale farmers, jua kali artisans and the like, and not manufacturers, how would they gain an edge over cheaper imports which probably enjoy subsidies and the like from their governments out there?

      • Honest Kenyan

        That’s what the lobbyist writer would have you believe. The farmers etc are. merely a mask. The real complaints here are industrialists seeking to benefit from tax waivers and restore old loopholes.

    • BMaina

      Dear Honest Kenyan. the only benefit to manufacturers from the VAT law is reduction in administrative complexities and ease of refunds. As input VAT can be claimed back. Where VAT has been imposed on supplies, this has been passed on to consumers as VAT is a CONSUMPTION tax. Where consumers refuse to pay higher prices, producers of those goods will be affected. AS it is right now, the most affected businesses are small businesses who cannot claim back the VAT they paid.

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  • Patriot

    I am very happy to see KAM painting a grim picture of the reality on the ground as VAT is indeed adversely affecting several businesses. I however wish to remind KAM that at the time when most of the other sectors were opposing the VAT 2013 Bill, KAM (and KEPSA) was at the forefront of supporting the Bill.

    What has happenend to bring about this about turn?

    • bMaina

      Patriot – KAM still supports the Adminstrative reforms in the VAT law that reduced complexity and gave more clarity on how to work out the applicable Tax. We also support the reduction in the number of items that are Zero-rated that attracted those refunds.
      However, this article is not about the impact of those administrative reforms. It is about failure to consider who would be affected and impact on competitiveness. When you make products exempt – producers cannot charge VAT on them but have to pay VAT on their inputs. So they pass on the full impact to consumers – who of course would not want higher prices. So we see a reduction in demand or shift to cheaper products – probably imports or illicit goods. This has happened in the case of agricultural inputs. The impact on business – especially small businesses is dire.

  • Patrick Mureithi Muriuki

    I sell Eggs and have well over a 1000 Chicken. Before September I could not supply all the orders I had, today most orders have been cancelled especially from the supermarket chains who are finding eggs from Uganda cheaper.

  • Kwessi Pratt

    While revenue is important for any nation, VAT regime in Kenya has been at best, foreign and patently anti-people. Armchair business people who designed it from the onset, had no good intentions for the country but theirs. There are numerous reasons for saying that. Raising revenue for government should NOT be anti-business or anti-people. Of course, since way back in 1993, businesses are supposed to make their returns before or on 20th of the following month, or inform KRA you wont meet the deadline. You are then charged 3% or more for that delay for amount due. In other words, KRA starts milking the cow before the owner! Thats NOT busines-friendly!

    Most business, nearly 70%, is done on credit. And as most business people know, payment for such must be within 30 days or even more. Infact, commonest period is 90 Days – 3 Months! A new business blessed with alot tenders MUST therefore look for money outside the business to pay KRA within the specified period. Law of this nature is wickedly colonial. Since it has very little regard for general well-being of the country. A law that suppresses business is colonial because it refuses to let the country grow. It must be noted colonizers never gave a damn whether we economically grew or not. They knew they were developing their economies back home and what happened to locals/natives mattered very little, if at all. Independent Kenya has been rigidly operating in those same same anti-business perimeters!

    Colonial laws have NEVER EVER been removed from our statutes, let alone from our minds! Those laws were anti-country and I guess, thats why our growth was arrested at our formative stage. Need I say that we are happy with foreign Somalis running shows in eastern Nairobi and other major towns. But council Askaris wont allow that Mama who sells greens on pavements! We never hesitate to destroy or burn property for our poor people. However, as it was always with colonizers, we never tire in promising those very same people better life that never comes!

    Kenyans are now the most taxed people on earth. But we are far from being satisfied with that. Every available item is headed for taxation! However, fruits for that heavy tax are no where to be found! Its about time, tax regime was completely overhauled. We have been measuring ourselves against Asian tigers that we were at par with 50 years ago. But no one has tried to understand our huge economic policy differences.

    In Asian tiger countries, polcies are strictly geared towards improving the lives of all citizens. Leaders are ever ready to die not only for those policies, but also for their respective countries. In Kenya, the situation is totally in the reverse. Kenyans are willing to die for personal wealth and NOT the country. Thats why council Askaris are repeatedly sent out to deal with those who are “spoiling our businesses!” No one realizes everytime you destroy property, you destroy part of Kenya. Unemployment is just too high fot the country to afford these heartless antics. Those willing to do business MUST be encouraged by state to continue. They should only be given areas of operation in form of “free tax sites.” Of course, taxing a small lots banana seller doesnt make sense at all.

    Finally, we all need to rethink all our laws for most of them are rooted in our anti-people colonial past. When laws and policies are inividualistic, the country retards. We need laws that are people-friendly, business-friendly and nationalistic. Why is it that ALL OUR LAWS MERELY FOR PUNISHING? Holding on ANTI-PEOPLE past for better of very few MUST BE DISCARDED SWIFTLY TO MAKE THE COUNTRY GROW. Yes we can!!

  • Daniel Wahome

    Common sense tells you that a country should support production. At this rate, there is no need to have a Cabinet Secretary for Industrialisation and Enterprise Development if every new business idea is subject to a retro tax regime. Simple things tell you the fellows at Treasury have been told – we are spending so much – find ways of raising money. In the process we are killing the goose that has always laid the golden egg.
    Secondly, the tax collected when spent in procuring government goods is based on a law that says “lowest qualified bidder” and not “competitive market price”. Let me put that in caps – LOWEST QUALIFIED BIDDER and not COMPETITIVE MARKET PRICE. This means that If three people bid to supply biros to the government and A quotes 54, B quotes 52 and C quotes 53 for the same biro, B will be awarded the tender. The sad thing is that biro even when extravagantly priced costs 20 bob. Even given the cost of credit at 30%, I still think the government “overspends” on purchases by 40% – 70%, and that does not include the wage bill.
    Simply we are living in a country where we are taxed from the womb to the grave without representation.

  • Tax exemptions and subsidies especially VAT only serve to benefit a few people. VAT is never your cost. All you need to do is to pass it to the customer. In my opinion, the writer is being subjective rather than objective in her argument as she represents one side of the divide. What we need is tax reform that satisfies all parties.

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