By Betty Maina
Consumers have been grappling with the increased cost of basic commodities following the introduction of the VAT Act. it is true that products such as bread and milk are exempt from VAT however the reason why the price will go up is not because the manufacturer has increased the prices however it is because if you look at the inputs that result in the total package such as the cover of packaging those do attract VAT and will result in an increase in the cost of the final product.
Other inputs such as the cost of electricity have also gone up as a result of the introduction of the VAT law. Electricity cost used to attract a tax of 12 percent and because of VAT the tax has gone up to 16 percent this therefore entails that the price of the final product may go up.
Therefore the price increases that may be experienced in some sectors are just a once off measure to cushion suppliers against the increases as a result of the implementation of the new law.
Manufacturers are however upbeat that in as much as there may be a shakeup in the price of basic commodities temporarily there will soon be a reduction in prices if all the grand plans by government to reduce the cost of doing business are implemented.
What both consumers and business alike should understand is that the country has good development plans and for these to be realized there is need to collect revenue inland without incurring huge debts and all citizens have to play a role in the development of the country.
There are plans to build more power plants which will greatly reduce the cost of electricity to about USD 0.09 from the current exorbitant US0.18, which will result in a massive reduction of prices. For the development journey to be successful money has to come from somewhere and VAT is one noble avenue of collecting revenue.
Economists argue that there is merit in subsidizing production as opposed to subsidising consumption. VAT for manufacturers makes the collection of revenue much easier and removes bottlenecks in the revenue collection system.
It is a no brainer that there are no policies that are a one-size fits all. There are obviously cases that will have to be considered in isolation like the case for pharmaceutical sector which has been negatively affected by the implementation of the new law.
Medicines are exempt from paying VAT however the inputs that go into making the products are subject to VAT which increases the prices of medicaments. The downside of this is that the local pharmaceutical manufacturing sector becomes uncompetitive both on the local and international scene.
Kenya’s pharmaceutical sector is the largest in the Common Market for East and Southern African (COMESA) region and as the country intensifies its market penetration into the African market it is important to address the concerns of this sector.
The local pharmaceutical sector manufactures generics medicines and medications that are priced very competitively and are used by 400 million people in the COMESA market.
The generic market excels in high volumes and very low margins hence local pharmaceutical manufacturers are very sensitive to any cost increases and face a market where they cannot increase prices.
Previously, pharmaceuticals manufacturers were on the zero rated category of goods and were able to claim back their VAT paid on input. This put them on parity with imported generics from India or China.
However, in the new VAT Act pharmaceutical manufacturers are now on the exempt list where they cannot claim this input VAT. The implication of this new change is very grave as VAT will now apply for their inputs and they will be forced to increase their final price. Unfortunately, this increased price will be higher than the imported finished good. It is important to note that the imported pharmaceuticals especially from India and China are already subsidised in their respective countries. The cost of production in these countries is also much lower than that of Kenya.
The bright side of this VAT Act for the country is that there has been a shift from subsidizing consumption to subsidizing production which is good in promoting global competitiveness of locally manufactured goods.
In as much as outstanding VAT refunds stand at over Ksh 20 billion, there is a concerted effort by the revenue authorities to address the situation. There were challenges in the previous system but industry is confident of the measures put in place to speed up the refund process. Manufacturers hold the view that the VAT refund bucket will no longer balloon as in the past as VAT refunds will be fewer.
The Revenue Authority had promised and we look forward to the introduction of the green, orange, and red channel that would help expedite payment of VAT refunds.
As the payment modalities are being implemented it is important for government to ensure that companies operating in Kenya are provided with an enabling environment in order to be globally competitive. There is need to maintain liquidity within companies so it is pleasing to note that there is a commitment from the Revenue Authority to expedite payment.