New taxes could raise poverty levels in Kenya, warns report

Nile Post News

The new taxes that the Treasury introduced through the Finance Act, 2018 are likely to push Kenyans further into poverty.

An analysis by the World Bank shows an increase in value-added tax (VAT) and excise duty pushes up poverty rates in Kenyan households.

The government introduced a number of taxes, including the controversial eight per cent VAT on petroleum products, which most observers have warned will raise the cost of living.

“The poverty rate increases by more than five percentage points after VAT is accounted for,” says the World Bank in the Kenya Economic Update 2018.

Other new taxes include a 15 per cent excise duty on telephone and internet data, 20 per cent on fees charged by banks, money transfer agencies and other financial service institutions and 12 per cent on fees charged for money transfer services by cellular phone service providers.

Sugar confectionery such as sweets will also attract excise duty of Sh20 per kilo.

“Excise taxes, which generate only half of the revenue that VAT generates, have a similar effect on poverty and inequality. They further increase poverty by about one percentage point, and lower the Gini index by 0.3 percentage points,” said the World Bank.

Although the government’s decision to introduce VAT on petroleum products – initially pegged at 16 per cent before President Uhuru Kenyatta’s intervention – has the probability of increasing poverty, Treasury might have countered the negative effect by zero-rating the consumption tax on flour made from maize, cassava, wheat or meslin.

The study found that most of the zero-ratings tend to have more positive impact on the poor than on the rich, noting that when tax exemptions and tax reliefs are removed the fraction of the poor’s expenditure on VAT increases.

“The expenditure share among the bottom 20 per cent increases from 7.2 to 8.4 per cent in going from zero-rates to the full 16 per cent tax rate and falls from 10.3 to 9.7 among the richest 20 per cent,” said the global lender.

Zero-ratings on VAT and exemptions affect mostly agricultural products, and with food making up a large share of the low-income household’s expenditure, tax reliefs have been a welcome relief.

But the World Bank is also worried about the many tax exemptions and zero-rating which have seen Kenya’s share of VAT as fraction of total revenue lag behind its peers in low-and middle-income countries, where VAT accounts for 60 per cent of the revenues.

“The number of VAT exempt categories in Kenya recently increased to more than 30, with a resulting loss in tax revenue of about two per cent of GDP in 2015,” said the bank.

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