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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