As a tax, value added tax (VAT) works better in a country with a large formal sector with established practices of good record keeping and where the level of tax compliance is high.
Kenya is the opposite. Here, the informal sector accounts for between 60 to 80 per cent of the economy. We also know that out of a working-age population, only 1.8 million are on formal wage employment. The majority are in the informal sector.
There is a second reason why implementation of VAT in our context is bound to be problematic. The threshold for registration under VAT is annual turnover of Sh 5 million. In other words, 90 per cent of private enterprises in this economy operate below the VAT threshold.
Accordingly, all VAT that they incur on their inputs and purchases sit on them as a ‘final tax’. They can’t charge VAT on their sales but must absorb VAT on their purchases. In other words, they must adjust prices whenever there is an increase of VAT.
If you are registered, you are able to offset the VAT you have paid to the amount you are due to pay the Kenya Revenue Authority (KRA).
What is my point? It is that before you levy VAT on a critical input in the economy –for instance- petroleum products or fertiliser or agrochemicals you must calculate the likely impact on the majority of the population.
In our context, where VAT is a final tax to a large swathe of enterprises in the private sector, any minor upward adjustment will ripple through the supply and value chains, causing havoc and exacting big changes in consumer prices.
Didn’t we all hear the Agro Chemical Association of Kenya protesting that the proposal to increase VAT on agro chemicals by 16 per cent was going to increase their costs by 50 per cent? The East Africa Farmers Federation also came out to protest, pointing out that their costs would go up by 40 per cent.
Which brings me to the controversy over the introduction of VAT on petroleum products.
When the proposal to impose 16 per cent VAT on petroleum products came up, the MPs decided to kick the can down the road for two years. Clearly, our policymakers did not look at the picture.
Because petroleum products are a critical component in three areas of the economy – transportation, power, cooking and lighting, we should have given the idea of imposing VAT on it a little more thought.
Take the example of cement. Transporting clinker to the factory will now go up by eight per cent. Burning the clinker in the ovens will require power whose cost will go up by eight per cent of fuel cost adjustment. To ship the cement to customers- I have to incur eight per cent more cost on fuel. When the transporter- who will be an SME not registered under VAT- the cement to the building site, they also incur the extra eight per cent VAT.
The point here is this. An eight per cent increase on VAT on petrol does not mean that consumer prices will go by a mere eight per cent.
Because of the ripple effect, the increase in prices to the final consumer may go up by a massive 50 per cent because of this telescopic effect.
This is the point our policymakers missed when they sought to give the impression that bringing down VAT on fuel from 16 per cent to eight per cent was such a big concession.
Even as we were obsessed with VAT on petrol, a bigger crisis is looming in the important agriculture and food sector.
VAT on agrochemicals and pest control products was surreptitiously moved from zero rating to VAT exempt.
The upshot of that is that VAT on inputs can no longer be claimed as before.
The immediate reaction by the agrochemical industry was to apply VAT from July 18 which is the date of assent of the Finance Bill. The industry went further to warn farmers to expect to pay 50 per cent more on agro chemicals and pest control products.
We are staring at higher prices to farmers, less use of agro chemicals, and higher food prices. Farmers are not as influential as motorists when it comes to influencing policy.
World Bank pushes G-20 to extend debt relief to 2021
World Bank Group President David Malpass has urged the Group of 20 rich countries to extend the time frame of the Debt Service Suspension Initiative(DSSI) through the end of 2021, calling it one of the key factors in strengthening global recovery.
“I urge you to extend the time frame of the DSSI through the end of 2021 and commit to giving the initiative as broad a scope as possible,” said Malpass.
He made these remarks at last week’s virtual G20 Finance Ministers and Central Bank Governors Meeting.
The World Bank Chief said the COVID-19 pandemic has triggered the deepest global recession in decades and what may turn out to be one of the most unequal in terms of impact.
People in developing countries are particularly hard hit by capital outflows, declines in remittances, the collapse of informal labor markets, and social safety nets that are much less robust than in the advanced economies.
For the poorest countries, poverty is rising rapidly, median incomes are falling and growth is deeply negative.
Debt burdens, already unsustainable for many countries, are rising to crisis levels.
“The situation in developing countries is increasingly desperate. Time is short. We need to take action quickly on debt suspension, debt reduction, debt resolution mechanisms and debt transparency,” said Malpass.
Kenya’s Central Bank Drafts New Laws to Regulate Non-Bank Digital Loans
The Central Bank of Kenya (CBK) will regulate interest rates charged on mobile loans by digital lending platforms if amendments on the Central bank of Kenya Act pass to law. The amendments will require digital lenders to seek approval from CBK before launching new products or changing interest rates on loans among other charges, just like commercial banks.
“The principal objective of this bill is to amend the Central bank of Kenya Act to regulate the conduct of providers of digital financial products and services,” reads a notice on the bill. “CBK will have an obligation of ensuring that there is fair and non-discriminatory marketplace access to credit.”
According to Business Daily, the legislation will also enable the Central Bank to monitor non-performing loans, capping the limit at not twice the amount of the defaulted loan while protecting consumers from predatory lending by digital loan platforms.
Tighter Reins on Platforms for Mobile Loans
The legislation will boost efforts to protect customers, building upon a previous gazette notice that blocked lenders from blacklisting non-performing loans below Ksh 1000. The CBK also withdrew submissions of unregulated mobile loan platforms into Credit Reference Bureau. The withdrawal came after complaints of misuse over data in the Credit Information Sharing (CIS) System available for lenders.
Last year, Kenya had over 49 platforms providing mobile loans, taking advantage of regulation gaps to charge obscene rates as high as 150% a year. While most platforms allow borrowers to prepay within a month, creditors still pay the full amount plus interest.
Amendments in the CBK Act will help shield consumers from high-interest rates as well as offer transparency on terms of digital loans.
Scope Markets Kenya customers to have instant access to global financial markets
NAIROBI, Kenya, Jul 20 – Clients trading through the Scope Markets Kenya trading platform will get instant access to global financial markets and wider investment options.
This follows the launch of a new Scope Markets app, available on both the Google PlayStore and IOS Apple Store.
The Scope Markets app offers clients over 500 investment opportunities across global financial markets.
The Scope Markets app has a brand new user interface that is very user friendly, following feedback from customers.
The application offers real-time quotes; newsfeeds; research facilities, and a chat feature which enables a customer to make direct contact with the Customer Service Team during trading days (Monday to Friday).
The platform also offers an enhanced client interface including catering for those who trade at night.
The client will get instant access to several asset classes in the global financial markets including; Single Stocks CFDs (US, UK, EU) such as Facebook, Amazon, Apple, Netflix and Google, BP, Carrefour; Indices (Nasdaq, FTSE UK), Metals (Gold, Silver); Currencies (60+ Pairs), Commodities (Oil, Natural Gas).
The launch is part of Scope Markets Kenya strategy of enriching the customer experience while offering clients access to global trading opportunities.
Scope Markets Kenya CEO, Kevin Ng’ang’a observed, “the Sope Markets app is very easy to use especially when executing trades. Customers are at the heart of everything we do. We designed the Scope Markets app with the customer experience in mind as we seek to respond to feedback from our customers.”
He added that enhancing the client experience builds upon the robust trading platform, Meta Trader 5, unveiled in 2019, enabling Scope Markets Kenya to broaden the asset classes available on the trading platform.