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New Tax Measures Won’t Affect Safaricom’s Performance – Citi

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Last week, Safaricom’s share price dipped by more than 10 per cent after the Government, under the Finance Bill 2018, introduced an 8 per cent VAT on petroleum products, 20 per cent excise duty on money transfers, and a 1.5 per cent employer’s contribution towards the affordable housing agenda.

“While we think some conservative estimates about how the approved and proposed taxes could impact Safaricom growth seem to be in the price, the risk of any further measures to address the budget deficit, which could have implications on the sector/company, as well as regulatory risks remain relevant,” a report by Citi observes.

Citi further noted that the increase on VAT will have very little or no effect on the revenues of Kenyan telcos.

The report states: “Our conclusion is that VAT tends to have little if any impact on the top line performance due to low elasticity of demand; competition or telecom regulation driven price cuts (retail price regulation for example) tend to have more material impact on growth, including due to the depth of such price cuts.”

Increase on Money Transfers

The report also notes that according to the President’s memorandum, the excise duty increase on money transfers to 20 per cent will not touch on M-Pesa payments. The report indicates that the increase will affect fees charged by banks and agencies but not agent transactions and peer-to-peer payments.

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Target Share Price

Based on discount cash flow (DCF) valuation, Citi Research gives Safaricom’s share price a target of Sh27.20 which could deviate to a higher price than this due to growth in M-Pesa and data that is faster than expected and a reversal of taxation to the gaming sector.

Other risk factors that could see the price increase beyond Sh27.20 according to the report include consolidation or smaller telecom players leaving the market and the growth of EBITDA margins that is faster than expected because of the rise of fee/ partnership revenues.

On the other hand, the price could be affected negatively by regulations in the telecom sector in favour of smaller players, financial regulation such as mobile interoperability which may weaken M-Pesa’s competitive advantage, review of corporate taxes and excise duties imposed on the telecom sector, faster-than-expected pressure on voice as data use and smartphone penetration grows, and mergers and acquisitions risk.

The telecom company last traded at Sh24.00 as at 21 September on the NSE, indicating a 3.03 per cent drop compared to its previous price of Sh24.75.

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Bank dominate NSE as weekly turnover hits KSh3.1 Billion

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The Banking Sector was the most active at the Nairobi Securities Exchange(NSE) when trading closed last week, with shares valued at KSh 1.8 Billion transacted which accounted for 60.96% of the week’s traded value.

KCB was the top mover in this sector with 21 Million shares valued at KSh 925 Million at a price of KSh 41.95 per share.

Equity Group Holdings traded a total of 20 Million shares during the week, valued at KSh 823 Million at the price of KSh 40.95 per share.

The Telecommunications sector was the second most active during the week, with Safaricom moving shares valued at KSh 980 Million, accounting for 32.14% of the week’s traded value.

However, its share price fell by 3.43% to KSh 39.40, down from KSh 40.80 registered the previous week.

Nairobi Business Ventures(NBV) was the week’s top gainer, its share price rising by 12.13% to close the week at KSh 4.90 per share from the KSh 4.37 per share posted in the week prior.

The NBV stock began the year with a share price of 4.28 KES and has since gained 14.49% on that price valuation, ranking it 7th on the NSE in terms of year-to-date performance. This counter has accrued 10.11% over the past four-week period.

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WPP Scangroup Plc was the week’s worst-performing counter with an 8.85% drop in share prices to KSh 5.56 from KSh 6.10 recorded the prior week.

NSE Weekly Indices Movement

Weekly turnover at the bourse increased by 14.23% to KSh 3.05 Billion from KSh2.67 Billion realized the prior week.

The benchmark NSE All Share Index (NASI) declined by 3.12% week on week to close the week at 165.76 points.

The NSE 20 Share Index lost 0.75 points or 0.04% to close Friday at 1,862.50 points, while the NSE25 share index dropped 139.90 points or 3.73% from last week’s close to stand at 3,586.62.

The NSE 20 has shed 0.28% while the NSE25 has gained up to 5.02% respectively in the year to date performance.

During the week, the bourse also launched the unquoted securities market (USM) as it seeks to boost trading at the bourse amid the COVID-19 squeeze.

The Derivatives Market segment at the bourse closed the week with a total of 203 contracts valued at KSh 8.2Million transacted from 203 contracts valued at KSh 8.2 Million posted in the preceding week.

The Secondary Bond Market posted a 3.38 % rise in activity with KSh 21.19 Billion worth of bonds traded against the KSh 20.50 Billion worth of bonds transacted in the prior week.

ALSO READ:NSE Weekly Turnover Declines 35.3% to KSh 2.06 Billion

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Kenya needs a new tax policy that will drive the economy forward

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Hundreds of Locals await services at the Kenya Revenue Authority.[Maarufu Mohamed, Standard]

While Kenya’s history is replete with economic blueprints ranging from Vision 2030 to the Big Four Agenda, there has not been clear articulation of the principles guiding the collection of revenue to fund the country’s growth plans.

And as Kenyans find themselves facing a mountain of debt and its attendant high taxation policies that touch on everything from bread to infant milk, the anger is palpable.

Now more than ever, there is a great need to have a new tax policy that outlines the principles that will guide the Kenyan economy into prosperity.

Ideas around taxation principles have been floated by various thinkers over the last few centuries. Adam Smith wrote in the Wealth of Nations that “…the economic incomes of private people are of three main types: rent, wages and profit. Ordinary taxpayers will ultimately pay their taxes from at least one of these revenue sources.”

In his mind, Smith must have classified the entire economy into the three factors of production of land, labour and enterprise. His ideas have been enriched over time and today we also include the fourth factor of production which is capital – whose income is in the form of interest.

In many ways, these four factors of production might be compared to the four legs of a table that give it stability and balance. They are the four building blocks of the economy – emphasising one at the expense of others creates an imbalance and generates instability across the entire system.

Of all the four factors of production, it is the entrepreneur who has borne the brunt of over taxation.  From the introduction of the digital service tax targeting online businesses to the increase in VAT on fuel products, and now with the controversial minimum tax laws, the catalogue of obstacles facing the business community is alarming.

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All this while, the Covid pandemic is ravaging the economy, leaving many jobless and contributing to a very restless environment. Whereas many might hope that the full reopening of the economy will help mitigate this harsh environment, there is a wave of discontentment across the country that calls for a fundamental transformation of our economic model into one that values and promotes enterprise and innovation.

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In sharp contrast, the factor of production associated with capital appears to have been spared from the harsh taxation regime evident in the other areas. The Treasury proposal to remove the excise tax of 20 per cent on bank loans will lessen the tax load in the banking sector by up to Sh7 billion annually. There was a promise that this could see banks reducing loan costs, but these claims have been impeached by evidence on the ground pointing to the contrary.

Such examples reinforce a narrative that Kenya’s economic model is anchored on punishing enterprise but rewarding capital.

In the final analysis, a sense of balance and stability can only be achieved through a new tax policy that equally draws from all the factors of production.  Through a spirit of shared responsibility, Kenya can be able to raise enough tax revenue without one party feeling overburdened.

The writer is Chief Economist at Mentoria Economics

 

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Finance Bill 2021 hints at increasing the VAT rate

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The Finance Bill 2021 has proposed to remove the requirement for the Cabinet Secretary, National Treasury and Planning to table any VAT Regulations to Parliament for approval.

Experts point out that if this proposal is passed into law, then National Treasury will be able to come up with new tax measures and implement them without any oversight from the National Assembly.

Apart from Kenya, all other member states of the East African Community Countries have pegged VAT at 18%. Pressure is also mounting from the International Monetary Fund for Treasury to increase VAT so as to boost tax revenue collection.

According to an analysis by accounting firm KPMG, this proposal implies that new VAT Regulations will be implemented without any prior approval by the National Assembly.

“If this amendment in the Finance Bill is passed into law, this will raise a Constitutional concern as the National Treasury will be at liberty to implement new VAT legislation without going through the National Assembly for approval,” said Peter Kinuthia-Director & Head of Tax and Regulatory Services, KPMG Advisory Services.

At present, any tabling of regulations before the National Assembly is provided for under the Statutory Instruments Act (STA), which includes a procedure for parliamentary scrutiny of all statutory instruments.

The STA provides that the Cabinet Secretary shall, within seven (7) sitting days after the publication of a statutory instrument, ensure that a copy of the statutory document is transmitted to the responsible Clerk for tabling before Parliament.

The STA further provides that where a copy of a statutory instrument required to be laid before Parliament is not so laid, it shall cease to have effect immediately after the last day that it was supposed to be so laid.

“On this basis, the proposed deletion in the Finance Bill goes against the spirit of the Constitution as envisaged in the STA as it seeks to remove the Parliamentary oversight on Regulations,” said Kinuthia.

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The Finance Bill, 2021 (the Bill) was introduced for first reading in the National Assembly on 5 May 2021.

This is consistent with the recent norm where Finance Bills are introduced for debate before reading the budget in June of each year.

The COVID-19 pandemic has impacted the Government’s ability to meet its expenditure requirements amid pressure for additional resources to service the current debt load.

“This informs the additional tax revenue mobilization measures contained in the Bill, to finance the ambitious KSh 3.6 Trillion 2021/22 budget,” said Kinuthia.

VAT on Bread

Another contentious proposal in the Finance Bill 2021 that is likely to elicit sharp public anger is to charge VAT on bread, an essential item on the table of many households.

“The proposed change of VAT rate, contained in the Finance Bill 2021, on the supply of bread from zero rate to VATable will increase the price of this product which is a staple food for the ordinary Kenyan. The proposal to subject ordinary bread to VAT is likely to face a lot of pushback due to reduced incomes arising from the containment measures introduced globally to fight the COVID-19 pandemic,” said Kinuthia.

The Bill also proposes to include more goods and services in the excise duty regime such as locally manufactured sugar confectionaries and white chocolates and re-introduce excise duty on betting at a rate of 20% of the amount wagered or staked.

“This could see punters pay billions of shillings in tax. The tax was initially introduced in the year 2019 but was removed in July last year through the Finance Act 2020 following lobbying by betting firms. If this proposal is passed, the current duty reprieve will indeed be short-lived,” said Kinuthia.

He added that the reintroduction of the excise duty at 20% could see a situation where key industry players exit the market, citing an unsustainable and unfavourable business environment.

ALSO READ: Kenya’s Parliament nods Bill to hike VAT, Individual and Corporate tax in 2021

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