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Thursday, June 11, 2009

Uhuru needs to tax somebody!

When deputy Prime Minister and minister for Finance Uhuru Kenyatta opens his briefcase at 3 p.m. today, several sectors will be holding their collective breath.

Unlike the unrealistically extravagant Budget presented by Amos Kimunya last year, this year’s document is expected to be more about raising resources to revive the economy than expenditure. The telecommunications, brewing and tobacco sectors are likely to be on the alert because they are really the only industries Treasury can afford to raid without causing massive social and corporate backlash.

To be sure, the brewers and the tobacco sector have been doing rather badly after repeated tax increases, and the government might be tempted to let them grow volumes and taxation on the way. In addition to these, petroleum taxes could provide another outlet for Treasury despite the curious pump price rises — that appear to send subtle signals.

In a word, taxes on consumption will be an obvious target as most players do not expect a return to the raising of income taxation, which indeed was systematically brought down to under one-third in the 1990s. That has not dissuaded telephony firms from pushing for removal or reduction of excise tax, now consuming a tenth of the scratch card value. One look at the status quo is enough to tell you that long-term picture is not what a derailed Treasury will be looking at for now. Revenues are quite short and there is nothing to suggest this scenario is changing in the short run. The government has already signalled the IMF that they are intent on raiding the domestic market for Sh109 billion in the coming year as global and domestic economic situations remain precarious.

Interestingly, by the third quarter of this fiscal year, Treasury had borrowed Sh51.2 billion from the domestic market despite having budgeted for Sh34.2 billion — causing a serious cash crunch in the financial system that is only ebbing out. Further, government spending by that time according to Treasury documents stood at Sh390.1 billion, some Sh100 billion short of the budgeted figure as tax collection, after years of good performance, slipped below target. The revenues had been budgeted at Sh363.4 billion but were short by a whole Sh19.2 billion.

That tells the story of the Kenya economy since the violence of early 2008, which is unlikely to be rewritten shortly. With resources needed to cater for drought victims, Treasury will not be in a mood to cut taxes, but instead will be seeking to stretch its taxable resources while cutting down on so-called non-priority expenditure. This will be even more the case in view of shrinking external resources as traditional donors are kept busy fighting domestic fires as the global crisis bottoms out. Even players in the telecommunications industry — estimated to have contributed 6 per cent of the GDP in the East African Community — who somehow appear to be the most vocal in urging cuts, know this well.

There are two types of far-reaching taxes that Treasury levies on the industry. The first is the value added tax at 16 per cent; the second is the 10 per cent airtime tax.

Clearly, with about 17 million mobile and wireless subscribers, and with Safaricom especially having movedl ahead of East African Breweries as the national cash cow, telecommunications is now at the centre of fiscal policy in Kenya. “The effect of excise duty on the use of mobile phones in Kenya is that it has a negative impact on prices, subscriber acquisition, the size of the economy and long-term government revenues,” an industry lobby paper said. “Alternatively, the government can consider suspending this tax for a period of two years and in that period examine the effect on penetration of service and in stimulation of GDP.” The alcohol industry has equally been making loud noises about tax reduction, especially after last year’s Budget radically ratcheted up the sin tax.

Amidst rabid opposition from distillers, the government last year raised the tax on spirits from Sh80 to Sh280 per litre. This has consequently pushed companies to the brink, and some have in fact stopped marketing spirits. According to the firms, it is cheaper to import products than make them here because the excise tax is not loaded on the cost of imported products. “We are risking killing the industry and returning to the era of illicit liquor,” EABL corporate communications manager Ken Kariuki said in an interview. In the beer market, as inflation spirals and purchasing power dwindles, brewers have for years lobbied for a reduction of the excise tax on beer. It is now Sh54 per litre, and certainly any tinkering with it will draw huge protests from the domestic beer makers.

Cigarette makers as well know their products are fair game for sin tax. The industry has been pushing for lower taxes to beat illegal imports even as they grapple with punitive legislation that has reduced tobacco taxes over the years. Needless to say, they are unlikely to get favours from a hard-up Treasury.

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