- One of the most contentious proposals is the introduction of a 16 per cent VAT on bread, a staple food item that has long been exempt from taxation.
- In the context of a rapidly digitising economy, the elimination of VAT exemptions for financial services may have unintended consequences that run counter to the broader goals of financial inclusion.
- By disproportionately burdening the masses with increased costs for essential goods and services, these measures threaten to exacerbate poverty, inequality, and economic stagnation.
“The white man had indeed brought a Religion of the mouth.” These words from Chinua Achebe’s seminal novel Things Fall Apart echo a sentiment familiar to many Kenyans today – the creeping imposition of external systems that undermine traditional ways of life.
Just as the missionaries sought to reshape the Ibo society, President William Ruto’s Kenya Kwanza administration now proposes sweeping changes to the country’s Value Added Tax (VAT) regime, threatening to upset the delicate economic fabric woven by millions of Kenyan households and businesses.
President Ruto has unveiled a sweeping overhaul of Kenya’s Value Added Tax (VAT) system, ostensibly to fund the 2024-2025 national budget.
However, a closer examination reveals these proposals disproportionately burden the masses while potentially exacerbating economic hardship and inequality.
Scholar Media Africa aims to critically analyse the proposed VAT reforms, highlighting their regressive nature and potential adverse impacts on Kenyan households and businesses.
Bread Tax Conundrum
One of the most contentious proposals is the introduction of a 16 per cent VAT on bread, a staple food item that has long been exempt from taxation.
By removing this exemption, the government risks imposing a significant financial strain on low-income households, for whom bread constitutes a significant portion of their daily sustenance.
This move not only undermines food security, but also contradicts the principles of a progressive tax system, which should aim to alleviate the burden on the economically disadvantaged.
Motor Vehicle Tax Burden
The proposed Annual Motor Vehicle Tax, ranging from KSh 5,000 to KSh 100,000 based on the vehicle’s value, is another area of concern.
While the rationale behind this tax may be to generate revenue, it fails to account for the varying economic circumstances of vehicle owners.
For many Kenyans, owning a vehicle is a necessity rather than a luxury, particularly in areas with limited public transportation.
Imposing such a tax could disproportionately affect small businesses, entrepreneurs, and middle-class households, potentially hampering economic growth and mobility.
Increased Taxation on Financial Services
The Finance Bill 2024’s proposal to eliminate VAT exemptions for a range of financial services, including credit and debit card issuance, money transfers, and cheque processing, is a measure that warrants careful consideration.
On the surface, this move may appear to be a straightforward revenue-generating strategy for the government but, upon closer examination, it becomes clear that the implications of such a policy could be far more profound and far-reaching.
By introducing VAT on these essential financial services, the cost of accessing them will inevitably increase. This, in turn, may disproportionately affect vulnerable segments of the population, such as low-income individuals and small businesses, who rely heavily on these services for their daily financial transactions.
In the context of a rapidly digitizing economy, the elimination of VAT exemptions for financial services may have unintended consequences that run counter to the broader goals of financial inclusion and economic efficiency.
As the economy becomes increasingly reliant on digital payment systems, the imposition of VAT on services such as credit and debit card issuance, money transfers, and cheque processing may create barriers to entry for those who are already struggling to participate in the formal financial sector.
This could exacerbate existing inequalities and hinder the smooth flow of commerce, ultimately undermining the very fabric of the economy.
Furthermore, such a measure may also have a chilling effect on innovation in the financial technology (fintech) sector, as companies may be deterred from investing in new products and services that facilitate financial inclusion.
As such, it is essential that policymakers carefully weigh the potential benefits of this measure against its potential drawbacks and consider alternative strategies that can achieve the desired revenue goals without compromising the broader objectives of financial inclusion and economic growth.
Widening Digital Divide
The proposed increase in VAT on telephone and internet data services from 15 per cent to 20 per cent is particularly concerning in the digital age.
Access to affordable internet and communication services is crucial for education, business, and overall socio-economic development.
By making these services more expensive, the government risks further marginalising underserved communities and exacerbating the digital divide, ultimately hindering Kenya’s progress towards a knowledge-based economy.
Crippling Blow to Households
Like the locusts that descended upon Umuofia in Achebe’s tale, these VAT reforms threaten to consume the meager resources of Kenyan households.
The cumulative impact of higher bread prices, vehicle taxes, and increased costs for financial and digital services could push many families deeper into poverty, eroding their ability to afford basic necessities and invest in their futures.
Stifled Entrepreneurial Spirit
Small and Medium Enterprises (SMEs) are the lifeblood of Kenya’s economy, much like the vibrant markets that sustained the Ibo villages.
However, the proposed VAT changes could stifle this entrepreneurial spirit, making it costlier and challenging for businesses to operate, access capital, and reach customers through digital channels.
This, risks stifling innovation, job creation, and economic growth.
Unintended Consequences
As Achebe’s protagonist Okonkwo learned, even well-intentioned actions can have unintended and far-reaching consequences.
The proposed VAT reforms, while aimed at generating revenue, may inadvertently fuel resentment and social unrest, as Kenyans grapple with the economic burden imposed upon them.
This could undermine the government’s credibility and erode the social contract between the state and its citizens.
Call for Equity and Inclusivity
In the face of these regressive measures, we must heed the wisdom of Achebe’s elders, who urged their people to embrace change while preserving their core values.
The government should explore more equitable and inclusive means of revenue generation, such as closing tax loopholes, combating corruption, and fostering an enabling environment for sustainable economic growth.
Preserving the Social Fabric
Just as the Ibo society grappled with the erosion of its traditions, Kenya faces a crossroads where it must carefully balance economic imperatives with the preservation of its social fabric.
By disproportionately burdening the masses, these VAT reforms risk fraying the delicate threads that hold Kenyan communities together, undermining the very foundations upon which the nation’s prosperity rests.
Collaborative Path Forward
In Achebe’s tale, the tragic consequences of miscommunication and mistrust between the Ibo and colonial powers serve as a cautionary tale.
To avoid such pitfalls, the government must engage in genuine dialogue with stakeholders, embracing a spirit of collaboration and transparency.
Only through inclusive policymaking can Kenya forge a path that balances fiscal responsibility with the well-being of its citizens.
In conclusion, while the government’s goal of funding the national budget is understandable, the proposed VAT reforms raise significant concerns about their potential impact on the well-being of Kenyan citizens and the overall economic landscape.
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By disproportionately burdening the masses with increased costs for essential goods and services, these measures threaten to exacerbate poverty, inequality, and economic stagnation.
Instead of regressive taxation, the government should explore more progressive and equitable means of revenue generation, such as closing tax loopholes, combating corruption, and fostering an enabling environment for sustainable economic growth.
Failure to address these concerns may result in public backlash and undermine the administration’s credibility and commitment to inclusive development.
The writer is a lawyer and legal researcher.
Well authored 💫