VAT reforms: Why manufacturers want tax cuts

Higher household disposable income, increased funding for health, food security, and improved fiscal discipline by the government are among the key areas that many Kenyans want the National Treasury Cabinet Secretary John Mbadi to address in the budget for the next financial year. 

According to the Institute of Economic Affairs’ (IEA) Citizens Alternative Budget, individual Kenyans and businesses want the government to revise the pay-as-you-earn (PAYE) tax rates, which the institute said “can stimulate economic activity and support job creation, especially in MSMEs”.

IEA, which took views from corporates and individual Kenyans in crafting what it calls the citizens’ alternative budget, said there is a push by the citizens for the “budget to emphasise collaboration across health, education, agriculture, ICT and manufacturing to boost productivity and resilience”.

Among the industries which made presentations to IEA include manufacturers, who noted that revising tax rates for Kenyans in formal employment would play a role in growing consumption, which, other than lifting demand for products, could also increase revenue from some tax heads such as value-added tax and excise tax. 

The manufacturers also want the government to reduce tax on critical raw materials, introduce targeted VAT reforms and maintain excise duty exemptions on essential inputs to help the sector in its bid to grow its contribution to the economy. 

“(The manufacturers) also proposed revising PAYE bands and VAT thresholds to increase disposable incomes, stimulating domestic demand crucial for growth,” said IEA in a presentation of its alternative budget yesterday.

It noted that while real wages have nominally risen, it has been eaten into by factors such as inflation, with the result being “declining real wages,” which has reduced disposable income and consumption.

According to IEA, this has been “straining households and the wider economy”. 

The Kenya Bankers Association (KBA), which also presented at the IEA forums, has also proposed a reduction in Paye as a practical step to restore household income, stimulate spending, and support businesses. CS Mbadi had, in the recent past, said the government is considering giving relief for low-income earners, including exempting Kenyans earning below Sh30,000 from PAYE and reducing to 25 per cent those earning Sh50,000 and below.

The institute also said key health initiatives receive less than the required funds, which has compromised the plans to roll out universal health coverage. Hospitals also suffer delayed reimbursements from the Social Health Authority (SHA), forcing patients to pay out-of-pocket for health services, while health facilities also have to rely on high-interest loans as they wait for SHA payments.

IEA said education sector players want the government to invest in building and equipping laboratories, libraries and workshops, especially in disadvantaged or cluster four schools, close the digital divide between rural and urban schools and hire more teachers while enhancing capacity for existing teachers.

It also proposed improving agricultural subsidies through private sector participation. This, IEA said, would expand farmer choice, boost retail obs and ensure sustainable input access.  Raphael Muya, programme officer at IEA, noted that one of the major challenges in budget implementation over the years has always stemmed from Treasury’s highly ambitious tax revenue targets.

This is despite the Kenya Revenue Authority consistently missing collection targets.

The result, he noted, has been that the government ends up borrowing more to fill the gaps created by missed revenue collection targets. “We encourage the National Treasury to come up with realistic revenue projections. If they do that, we will start talking less about rationalising our expenditure and fiscal consolidation,” he said. Over the current financial year, tax collections are already showing signs of lagging behind the target.

Treasury data shows that as of January this year, tax revenues stood at Sh1.34 trillion, which is about 51 per cent of the Sh2.627 trillion ordinary tax collection target for the full year to June. With seven months elapsed, the government should have collected a 58 per cent of its annual target to remain on track. 

Muya cautioned against the government’s growing appetite for domestic debt, adding to the voices that have expressed concerns about the state crowding out the private sector from the loans market. “We want SMEs to do more business and create jobs but they can only do so when they have access to credit,” he said.

The government had borrowed Sh732.56 billion from the domestic market by January this year, inching closer tothe Sh885.9 billion it plans to borrow locally in the course of the 2025/26 financial year. The fiscal deficit for the year is projected to reach Sh1.14 trillion, of which Sh254 .8 billion will be external loans.