Treasury on the spot over 'illegal taxes'

By James Anyanzwa and Njiraini Muchira

Top mandarins at Treasury are facing a daunting task in preparation of the budgetary estimates for the 2012/13 financial year as MPs, the executive and banks lock horns over the Finance Bill.

By April 30, Treasury is supposed to present to Parliament budget estimates for the 2012/13 financial year in accordance with the new Constitution. With the deadline approaching in five weeks, bureaucrats at Treasury face another equally ominous headache after Parliament frustrated efforts to pass the 2011/12 Finance Bill over the interest rates standoff.

But even as acting Finance minister Njeru Githae put on a brave face last week during a meeting with MPs and bankers: maintaining there is no cause for worry, panic is rife in the Treasury over tax collection.

Since January, the Government has been collecting illegal tax from companies that were affected by tax adjustments contained in the2012/13 budget.

Though Githae is on record saying ‘these taxes’ would be ratified as soon as the Bill is passed, tax experts contend that any legal challenge in courts by the affected companies could see the Government slapped with a huge bill of refunding illegal taxes and possibilities of fines for taxes collected over the past three months.

Beer and cigarette makers were expected to get a tax reprieve since January first after Parliament delayed in passing the Finance Bill leaving the Treasury without authority to collect new taxes.

Most affected are supposed to be the ‘sin tax’ whose collection was overhauled to usher in single rates: meaning that beer and cigarette prices may be reduced until Parliament enacts the law.

Hard stance

Cigarette manufacturer British American Tobacco (BAT), which was among companies affected after the then Finance Minister Uhuru Kenyatta proposed to harmonise the excise duty regime for cigarettes at Sh1, 200 per mille or 35 per cent of the retail selling price is among companies affected.

"The Finance Bill has not been passed but we are paying tax based on the bill," said BAT Finance Director Philip Lopokoiyit.

The uncertainty and confusion that is now being generated by Parliament’s hard stance is causing panic at Treasury because the delay is affecting the preparation of the 2012/13 budget.

A senior government official at the ministry of Finance who did not want to be named confirmed that the Treasury was indeed hard pressed between a rock and a hard place.

"We don’t know exactly what will happen with this disagreement on the Finance Bill. It is really something that we are waiting to see. But it is such a big issue," said the source.

Budgetary transition

"This bill is taking too long. But we have done our part as technical people and now it is upon the MPs to act."

He added that though Treasury could take solace that insignificant revenues is hinged on the passage of the Bill, the budgetary transition process before the passage of the previous year’s bill creates a worrying precedent.

Parliament last week deferred the debate on the Finance Bill which contains the Government’s tax plans after Githae failed to negotiate his way out of a stand-off with MPs over control of interest rates. And tax experts, though opposed to the move to regulate interest rates, view the delay in the enactment of the Finance bill as disincentive to investors.

"I don’t actually agree with the measures the MPs are intending to take to control interest rates since we are in a liberalised economy but on the other hand I think we have an issue as far as passage of the Finance Bill is concerned. I think investor confidence may not be high," Nikhil Hira, head of tax practice at the Deloitte and Touche East Africa told Financial Journal.

Excise duty

Among other proposals contained in the Finance Bill 2011 include the removal of excise duty on kerosene to cushion Kenyans from the effects of high cost of living, an extended stay of Common External Tariff (CET) application to allow the importation of rice within the East African at 35 per cent instead of 75 per cent for one year and importation of wheat grain under the duty remission by gazetted millers at zero per cent, instead of the10 per cent granted last financial year, for one year.

" If I were an investor I should be worried," said Hira.

The Chief Whip and Gem MP Jakoyo Midiwo seeks to move an amendment seeking to cap lending interest rates at not more than four percentage points above the Central Bank Rate and deposit rates at 70 per cent of the CBR.

It is feared that introducing such amendments into the Finance Bill puts the executive in a difficult situation, as it leaves no room for the President to reject it.

Refusing to assent to the Bill would mean further delay in legalising the tax measures introduced in last year’s budget exposing the Government to legal challenge while passing it would force the Government to break a commitment it made to the International Monetary Fund not to control interest rates, making it difficult for the country to secure external assistance.