Author: John Bosco

It’s a budget of pain for liquor makers, retirees, importers, and online businesses to prop up the Sh1.6 trillion tax burden in the new financial year.

Also on the hit list are electric accumulators, helicopters, tractors, clean cooking stoves and cooking gas after the government had a change of heart and introduced a 14 per cent value added tax (VAT) on liquefied petroleum gas (LPG) and other items.

Companies, including those making losses, have not been spared either.

“On one hand, the proposal reduces the beers which are subject to excise duty while increasing the spirits subject to excise duty. Given that the excise duty on spirits is higher, the changes will increase the excise duty collections,” audit firm KPMG says in its assessment of the implications of the new measures.

The National Treasury has also proposed to subject the income of Home Ownership Savings Plans (HOSPs) to tax.

This proposal will go after financial institutions, fund managers, investment banks and building societies that have homeownership deposits.

The implication will be to reduce income available for distribution to depositors as interest, undermining their ability to purchase homes.

With a budget deficit of Sh835 billion, Treasury Cabinet Secretary Ukur Yatani had very little good news for millions of Kenyans rendered jobless by the Covid-19 pandemic.

Treasury will also now tax bonuses, overtime and retirement benefits.

From now, retirees will pay taxes on income from the National Social Security Fund (NSSF).

This will reduce benefits available to pensioners.

Treasury has also disallowed the expenses for companies seeking to list on the bourse.

This is expected to increase the tax bill of firms looking to list or float shares at the Nairobi Securities Exchange (NSE).

Club membership subscriptions and fees to clubs and trade associations will also be taxed.

Mr Yatani has also slapped a 1.5 per cent digital service tax on online transactions as the government moves to get a piece of the action in the growing e-commerce, which has seen a greater uptake due to the current stay-at-home restrictions.

“With the fast advancement in technology, many business transactions are increasingly being carried out through digital platforms,” the CS said.

This tax is expected to hit the youth most, many of whom have resorted to online businesses.

“Due to the nature of the transactions, it is sometimes difficult to tax the income derived through such platforms effectively. It is therefore necessary to provide a framework that will facilitate taxation of such income,” the minister said in his budget statement yesterday.

The Treasury also handed a double blow to loss-making companies. Such firms were exempted from taxes.

He said some companies continue to declare losses year after year, thus not contributing to the exchequer in terms of tax revenue.

“These companies enjoy facilities like infrastructure, whose cost of construction and maintenance is serviced by the government through revenues contributed by patriotic taxpayers,” he said.

Mr Yatani proposes to introduce a minimum tax that will be payable by companies at one per cent of their gross turnover.

It will be a bad financial year for companies given that they have already declared profit warnings due to the Covid-19 pandemic.

The CS said the new tax measures would generate about Sh38.9 billion.

He also proposed to introduce VAT on previously exempted concessions on specialised equipment for the development and generating solar and wind energy, and inputs or raw materials supplied to solar equipment manufacturers.

The Treasury chief has reintroduced VAT on plant, machinery and equipment used in the construction of plastic recycling plants.

He said manufacturing is a major pillar in the “Big Four” agenda and that the government intends to increase contribution of the sector to the gross domestic product from about eight to 15 per cent by 2022.

Treasury says it has proposed at the regional level measures aimed at promoting local manufacturing. The minister added that the Treasury would ensure locally manufactured products are competitive.

The customs measures will be effective from July 1.

To protect local manufacturers of iron and steel products from competition, the Treasury retained the rate of import duty at 35 per cent for another financial year.

The rate of import duty on paper and paperboard products has also been maintained at 25 per cent to protect local manufacturers.

Manufacturers of diapers are winners in this budget.

“Inputs for making baby diapers will be imported duty-free under the East African Community Duty Remission Scheme,” he said.

Inputs for producing new clothing and apparel, including fashion and design, will also be imported duty-free.

Telecommunication innovators are the other winners in Mr Yatani’s maiden budget statement.

Inputs for the assembly or manufacture of mobile phones will be shipped into the country duty-free.

The local leather and footwear industry also has something to smile about. Import duty has been retained at 25 per cent to discourage cheap imports, he said.

To protect local producers of electrical parts and accessories, the government has increased the rate of import duty to 35 from 25 per cent on such products.

The EAC has also struck a deal granting duty remission on raw materials and inputs for the manufacture of masks, sanitiser, ventilators, overalls, face shields and other Covid-19 personal protective equipment.

“This will enhance measures aimed at containing the pandemic in addition to encouraging the production of such items locally,” Mr Yatani said.

The EAC also exempted from import duty supplies for diagnosis, prevention, treatment and management of epidemics, pandemics and health hazards.

Landlords making less than Sh15 million annually will surrender 10 per cent of their income to the government. The Treasury raised the ceiling from Sh10 million in a bid to encourage landlords to pay taxes.

Kenya introduced a simplified monthly rental income tax in 2016 to enhance tax compliance among landlords.

Mr Yatani said the Sh10 million per annum threshold has had a positive impact on tax compliance, peompting the decision to raise the threshold to Sh15 million.

Farmers will have something to smile about after the government exempted maize or corn seeds from VAT.

Ambulance services have been exempted from VAT. This is in addition to medical, nursing and dental services which are exempt from VAT.

To encourage tax cheats to come out of hiding, Treasury has introduced a voluntary disclosure programme.

This, Mr Yatani said, will allow Kenyans who in the last five years may have inadvertently made omissions in their tax returns to voluntarily disclose such omission.

“The programme will run for three years. In order to encourage uptake of this plan, I propose to grant relief for penalties and interest in respect of what has been disclosed after payment of the principal tax,” he said.

Other winners are the Kenya Defence Forces (KDF) and the National Police Service, which will now no longer pay import declaration fees and the railway development levy.

“These charges reduce budgetary allocations of these institutions,” the CS added.

The exemption will apply to all goods, including materials, supplies, equipment, machines and vehicles imported for official use by security agencies.

In preparation to start collecting levies on new roads, the government has amended the Public Roads Toll Act.

It enables individuals to enter into an agreement with the government to collect toll on roads built and managed under such deals.

Mr Yatani has also introduced a 2.5 per cent additional duty in respect of goods entered for home use from export processing zone enterprises.

It is in addition to custom duties applicable to the removal of products from the EPZs for home use.

Kenya will spend Sh2.7 trillion in the new financial year.

However, this number does not capture in full debt repayments.

If these are factored in, the budget expands to Sh3.2 trillion.

Treasury always understates the actual size of the budget by leaving out debt redemptions on the grounds that they are not an actual cost as the loans are rolled over.

The government instead only accounts for interest on the loans.

In summary, the government will spend Sh1.82 trillion to run its operations.

This will include Sh1.1 trillion for recurrent expenditure, while the development budget for the Executive has been allocated Sh632.8 billion.

The Judiciary will get Sh18 billion. From this, the recurrent budget will receive Sh15.3 billion while the remaining is expected to go to development.

Parliament will receive Sh37.7 billion, with salaries taking Sh35.7 billion, while development will receive the remaining Sh2 billion.

President Uhuru Kenyatta and Deputy President William Ruto are expected to share a Ksh.41.2 million slice of the budget as salaries and allowances over the next fiscal year.

According to remuneration data contained in the National Treasury budget books, basic salaries to the two constitutional offices are estimated at Ksh.24.7 million while the balance makes for allowances.​

Allocations for the Deputy President Services office meanwhile total Ksh.1.8 billion out of a total Ksh.7.2 billion vote to the Presidency to include Ksh.176.9 million as development expenditure and Ksh.751 million as compensation to employees.

Former President Mwai Kibaki is meanwhile expected to receive a greater individual slice of the cake including a Ksh.22.6 million share as basic salary and Ksh.902,880 in allowances.

The Former President is further in line for a Ksh.34.4 million monthly pension.

Retired deputy presidents and other state officials including former Prime Minister Raila Odinga are set to receive a Ksh.50 million monthly pay out.

Total pensions to retired civil servants including members of parliament and the military are expected to round off to Ksh.119.2 million.

An analysis of the 2020/21 budget, which is expected to be read on Thursday this week by Treasury Cabinet Secretary Ukur Yatani, shows that TSC is among just 10 key dockets that account for more than two thirds of the Sh1.8 trillion budget the national government set aside.

Though a huge sum of the money will go towards the payment of salaries for over 320,0000 tutors across the country, it puts TSC chief executive Nancy Macharia in the spotlight as one of the accounting officers in the country with the biggest budget.

This is after the agency that manages the human resource in the education sector was allocated Sh266 billion in the new budget. It also cements education as being a top priority of the successive governments in Kenya.

In the new financial year, TSC plans to hire 4,920 primary school teachers as well as recruit an additional 4,300 intern teachers. For secondary schools, the commission will recruit an extra 5,000 teachers and a similar number of interns.

The TSC budget has been one of the fastest growing in Kenya. The commission was allocated Sh193.9 billion in 2016/17, Sh218.3 billion in 2017/18 and Sh241.1 billion in 2018/19. But the actual expenditure for the same period was Sh190.8 billion, Sh217.6 billion and Sh240.8 billion respectively.

In the same period, the commission registered 142,518 teachers; appraised 94 per cent of teachers, trained 92,000 teachers in Competency Based Curriculum (CBC), digitised 142,015 teacher files, implemented two modules of HMRIS as well as developed online services T-Pay (TMIS), TPAD and PC Porta.

The TSC is mandated to register trained teachers, recruit and employ registered teachers, assign teachers employed by the commission for service in any public school or institution, promote and transfer teachers and exercise disciplinary control.

TSC lists unplanned opening of new schools requiring additional teachers, increased enrolment in schools stretching existing teacher establishment and increased cases of litigations where teachers are challenging its decisions in court as some of its main challenges.

Others include inadequate ICT infrastructure, office space, equipment and insufficient funds to undertake some of its programmes.

The commission says the major outputs to be provided in the period 2020/21 to 2022/23 include improvement of teaching services by reducing the teacher-pupil ratio through additional recruitment, biometric registration of teachers, training teachers on CBC and digitisation of records for efficient and effective service delivery.

It also hopes to improve the quality of the teaching services through teacher professional development modules and creation of structures at county level to improve service delivery capacity at that level according to its key deliverables captured in the budget books.

2nd

Infrastructure Cabinet Secretary James Macharia is the second most powerful official under whose watch billions of taxpayers’ money will be spent.

This is after his ministry came second in the pecking order, having been allocated a staggering Sh189.5 billion in the new budget. Mr Macharia said his main priority for this new financial year would be roads.

This is “because roads have a very big impact on the lives of Kenyans. We are opening up roads into rural areas,” Mr Macharia said in an interview with the Nation. His docket also overseas the Transport department, which has been allocated Sh47.9 billion as well as the Housing and Urban Development department, which will receive a total of Sh17 billion.

In total, the amount of money under his watch adds up to Sh254.5 billion. Though he has several principal secretaries under him who are the accounting officers of the various departments, the overall direction of the ministry and policy guidance rests on his shoulders.

The budget document notes that during the 2020/21-2022/23, the State Department of Infrastructure plans to build approximately 5,424 kilometres of roads and rehabilitate a further 836 kilometres through the low volume seal and annuity programmes.

Several ongoing and new projects meant to facilitate and promote regional trade and spur economic activities will be undertaken,” the budget document reads in part.

Consequently, the department will prioritise building of roads under the Mombasa Port Area Development Project and South Sudan Eastern Africa Transport, Trade and Development Facilitation Project.

The department also plans to maintain 103,062 kilometres of roads through the Road Maintenance Levy Fund.

3rd

The third most powerful man from a budget allocation perspective is Dr Fred Matiang’i, whose mandate at the helm of the Interior and Citizen Services ministry has been expanding over the past three years. In the 2020/21 budget, the Interior ministry has been allocated Sh131.6 billion, ahead of the National Treasury.

His mandate includes coordination of national government functions at the county level, internal security, national cohesion and integration, development of the training of security personnel policy, border management (marine and terrestrial) as well as coordination of disaster and emergency response.

The ministry also oversees the national crime research and management, government chemist services, public benefits organisations, registration of births and deaths, registration of persons and the development of the National Integrated Identity Management System (Niims).

It also provides oversight on the national primary data registers for citizens and foreign nationals, the Integrated Population Registration Systems (IPRS), betting, lotteries and gaming, among others.

4th

The National Treasury comes fourth in line, beating the Defence ministry by a small margin. The ministry, headed by Ukur Yatani, whose mandate includes the preparation of the national budget, will spend Sh116.9 billion.

5th

Prof George Magoha. The Treasury has allocated Sh113 billion for university education.

Given that his mandate cuts across the early and basic education all through to tertiary education, he may rank as the topmost spender if you add up allocations of Sh100.7 billion for early learning and basic education, Sh24.9  billion for vocational and technical training as well as the Sh150 million for post-training and skills development.

In total, Prof Magoha will oversee departments with a total budget allocation of Sh239.1 billion.

Cumulatively, if you include the TSC, the education sector will get a staggering Sh505.2 billion to keep learners all the way from primary schools to university and technical training institutions in school in the next financial year.

The Health ministry, currently headed by Mutahi Kagwe comes in seventh with Sh111.7 billion after Parliament reduced its budget by about Sh3 bilion.

The Water, Sanitation and Irrigation docket, headed by Sicily Kariuki will get Sh77.7 billion, while Charles Keter’s Energy ministry completes the list of the top 10 spenders with Sh72.4 billion.

The Executive has about 63 different vote heads that will spend the Sh1.8 trillion in the 2020/21 financial year. But just 10 of them gobble up 70 per cent of this budget, leaving the remaining 53 agencies to share 30 per cent.

In total, Kenya will spend up to Sh2.7 trillion in the new financial year, in one of the most ambitious expenditure plans yet. If the full amounts in rolling debt redemption is added to this, then the budget will swell to over Sh3.2 trillion.

Recurrent expenditure in total will add up to Sh1.8 trillion, while development expenditure, including foreign financed projects and conditional transfers to county governments, is estimated at Sh584.9 billion.

To break down the budget, the national executive will take the lion’s share of the billions at Sh1.82 trillion. The second biggest expenditure item will be the Consolidated Fund Services (CFS), whose expenses primarily relate to public debt, pensions and salaries of constitutional offices and are mandatory expenses that form a first charge to the CFS.

In the new budget, the CFS expenditures are projected to amount to Sh1.04 trillion, according to the budget committee report, and will consume 55 per cent of the projected revenue for the 2020/21 financial year.

Public debt servicing is estimated at Sh904.7 billion.

“Interest payments account for 51 per cent of total debt service payments. Interestingly, the committee has established that the cost of debt financing actually consumes more financial resources than development expenditure, for which the debt is obtained,” the budget team says in its report.

The counties are expected to receive Sh369.8 billion in the new budget, while Parliament and the Judiciary will get Sh37.7 billion and Sh18 billion, respectively.

Application

Tanzania wants the East African court to prohibit KRA from taxing its imports to Kenya.

“It is therefore in the interest of justice to the nature and urgency of the application, and to avoid irreparable injustice being occasioned on Tanzania, this honourable court issues order to prohibit, restrain, and injunct the Government of Kenya … from continued implementation of the impugned decision at the exparte stage,” the application states.

Tanzanian glass manufacturer Kioo Company Ltd has taken the Kenya Revenue Authority to the East African Court of Justice following the introduction of a 25 per cent excise duty imposed on imported glass.

Based in Dar es Salaam, Kioo is one of the largest manufacturers of container glass used for packaging of soft drinks, beer, alcohol and food in East and Central Africa.

The company exports almost 60 per cent of its products outside Tanzania, after meeting its local requirement.

In the application, Kioo claims Kenya recently enacted the Business Laws (Amendment) Act 2020, which amended Kenya Excise Duty Act 2015 by introducing excise duty on imported glass at a rate of 25 per cent with effect from March 18, 2020.

They say the introduction of excise duty, excluding glass bottles for packaging pharmaceutical products, is a breach of the Customs protocol.
Represented by the firm Anjarwalla & Khanna, and Kenya’s Attorney General Paul Kihara is the respondent.

They want EACJ to ensure Tanzania’s rights under the EAC Treaty are not violated, the enacted excise duty is removed, and that Kenya is fined for their actions.

Under the Kenyan Excise Duty Act there are no exemptions granted to goods imported from the EAC partner states as the Act defines importation “as bringing or causing goods to be brought into Kenya from a foreign country, a special economic zone or an export processing zone”.

Tanzania accused Kenya of providing “preferential treatment of domestic products vis-à-vis similar products originating from other EAC Partner States” in violation the EAC Customs Union.

Tanzania is concerned that KIOO, is losing its competitive edge by paying duty at a rate of 25 per cent on its imported inputs, which should have ordinarily attracted zero per cent or 10 per cent duty as per the EAC Common External Tariff (CET).

CET guarantees zero per cent tax on raw materials, 10 per cent for intermediate goods and 25 per cent for finished goods.

Tanzania further claims that the 25 per cent duty on its glass bottles into Kenya is being incurred by her customers in Kenya, thereby making the business uncompetitive. This likely to squeeze out Tanzania and her neighbours out of the Kenyan market.

“The result is that the price of glass bottles exported into Kenya by Tanzania has become more expensive than locally manufactured glass in Kenya and therefore Kenyan companies have reduced their demands /imports from Tanzania. In the current economic hardship caused by Covid-19, the Kenyan companies are likely to stop importing glass from Tanzania and any other glass bottle manufacturers within the EAC Partner states,” the lawyers say.

They claim the move is also likely to render more than 600 workers at Kioo jobless.

Even after Tanzanian President encouraged his Citizens to hike prices when trading with Kenyans the ball is bouncing back hard on their faces