Sunday, June 16, 2013

Tax shocker in Cabinet Secretary Henry Rotich’s Budget in his bid to fund new rail system

By James Anyanzwa and Macharia Kamau
NAIROBI, KENYA: The phrase tightening of belts will assume a new meaning for Kenyans in the coming months, as the impact of the new tax measures becomes clearer.
It has emerged the tax measures unveiled on Thursday will see increases in the prices of fuel, kerosene, diesel and other essential imported goods. This follows the slapping of a blanket duty on imports by the National Treasury.
The implication of this new levy, hidden in the Budget goodies, dawned on many a day after Cabinet Secretary Henry Rotich presented his first budget statement warning consumers a controversial 16 per cent VAT hike is likely.
Other tax measures included a return of capital gains tax and minor tweaks to customs and excise taxes. The proposed Railway Development Levy, however, comes as a shocker and could have serious implications on consumers, besides having the potential to fuel inflation.
Rotich also proposed to introduce a customs warehouse rent for goods that remain at the port of discharge for a period exceeding 21 days. This could lead to heavier penalties on importers already burdened by clearing and forwarding firms that collude with container depots to delay clearance.
“Some importers have turned the Port into a storage area thus contributing toward congestion of cargo,” said Rotich. This could see commodity prices pushed up further in the case of delays in discharging cargo.
Tax experts are raising the red flag on the introduction of the railway levy whose ripple effects, they say, would reverberate in the entire economy. Transportation costs, prices of clothing, motor vehicles, machinery and foodstuffs are expected to rise significantly in the next few months.
Already, consumers are shouldering a heavy burden of road maintenance levy to the tune of Sh3 per litre of fuel. Industry insiders fear that the proposed railway levy could further increase pump prices by Sh2 per litre. 
“This (Railway Development Levy) is akin to the road maintenance levy that is already in place,” said Steve Okello, Tax Partner at consultancy and auditing firm PricewaterhouseCoopers (PwC). “Its impact in the short-term will be inflation and increase in the prices of goods. There will be a short-term impact but in the long-term, it will be neutralized.”
Atul Shah chief executive PKF said: “There will be an element of cost push inflation being triggered by the levy and consumers will bear that cost. In the short-term, inflation will hit us. If the funds are used for railway development, the overall long-term benefit will be a reduction in cost of goods... if 70 per cent of the truck traffic is moved to railway, it will mean a reduction in transportation charges as well as the wear and tear on roads. In the short-term, however, consumers will pay more.”
Fuel prices
A fall in fuel prices had pushed down inflation rate to settle at 4.05 per cent in May, up from 4.14 per cent in April, but fears are rife that the proposed levy could re-fuel inflationary pressures and erode households purchasing powers. The situation could be made even worse with the re-introduction of VAT Bill, which proposes to slap a 16 per cent tax on basic commodities, such as unga, milk, sugar and bread.
The cost of farm inputs, including fertiliser, livestock feeds and pesticides will also go up by the same margin. This could lead to an increase in the prices of vegetables, fruits, maize and other farm products. In his budget statement, Rotich said the 1.5 per cent railway development levy, imposed on all imported commodities, is expected to mobilize Sh15 billion for the construction of the Mombasa-Kisumu Standard Gauge Railway line. The three-year project is expected to reduce the cost of freight.
Going by the Petroleum Import Bill of Sh326.9 billion recorded last year (2012), the National Treasury could generate about Sh4.9 billion from importation of crude oil to finance the development of the railway line per year.
Import Bill
The total import Bill for 2012, however, stands at Sh1.4 trillion: This could be the figure Rotich is eyeing in the next financial year with the new levy. The revenue raised could amount to more than Sh21 billion.
 “The railway system will be good for the ordinary person, especially in the long-term,” says Kariithi Murimi, a risk consultant. “If we can get it to work, the price of goods could significantly come down. For instance, when millers import maize and use the road instead of the rail, the cost incurred using the road is about Sh5 more than if they used rail. This is passed on to consumers. When oil marketers use the road, there is an extra Sh8 per litre of fuel.”
The National Treasury is seeking to tap into new sources of revenues to finance the Government’s ballooning expenditure needs. Faced with crippling revenue shortfalls, demands for higher pay by public servants, pressure for money from governors and a burgeoning public debt, Mr Rotich is desperate not to stifle the country’s growth by cutting his development budget. He is counting on borrowing, support from multinational lenders and expansion.
Although the Secretary for the Treasury has set the domestic borrowing requirement at a fairly low level of Sh106 billion, indications are that the Government will be aggressive in the international market.

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