How budget can have impact on manufacturing

Sachen Gudka

Each year, the National Treasury presents its revenue sources and expenditure proposals through the budget statement to inform the development of the Finance Bill. 

In a few days, the National Assembly will debate the Finance Bill 2019. This debate is the make or break point for the revenue measures proposed. 

This is a critical point at which we should analyse whether the proposed measures will deliver economic prosperity for the country.

Taxation is a crucial element in the cost of doing business and the competitiveness of industry.

This is why the 2019/20 budget statement was received with optimism by many in industry because majority of the proposed measures lean towards boosting the manufacturing sector.

That said, it is important to ensure that the measures proposed can realistically bring about the desired outcome; which is to increase the sector’s contribution to GDP by seven per cent by 2022.

Unfortunately, some cracks are beginning to emerge in the proposed taxes raising questions on how thoroughly we have examined the practicality of these measures.

For instance, the Finance Bill proposes the exemption of VAT on agricultural pest control products.

Although this proposal seeks to reduce manufacturing costs, the current Kenya VAT exemption framework does not allow manufacturers to claim their input VAT.

Hence they will have to bear these costs leading to the increased cost of production, which they will ultimately pass to end users.

Agricultural pest control products are key inputs in the agricultural sector, which the government has prioritised in the Big Four agenda, under the Food Security Pillar which seeks to expand food production and supply, and reduce food prices. 

It ties in with the manufacturing pillar in terms of its support to value addition within the food processing value chain.

Agriculture sector accounts for 75 per cent of the country’s workforce and about 25 per cent of the GDP.

Raw materials and products such as tea, coffee and floriculture products are Kenya’s top export earners. Zero-rating such inputs would see the government realise revenue goals.

Another example is the introduction of increased excise tax of nearly 10 per cent on tobacco products and Sh20 per kg excise tax on sugar confectionery and chocolate.

This increased tax means higher prices, which will hit the pockets of many consumers. 

And as consumers seek affordable alternatives, it opens up loopholes for the burgeoning of illicit trade which not only destabilises economies but also threatens the health of citizens.

Additionally, such tax measures will result in the decline in the government’s revenue as illicit products infiltrate the market whilst legit businesses decrease production or shut down. 

We also need to be careful about resorting to increasing taxation as a reaction to shrinking revenue streams.

Unless critical measures are taken, the Finance Bill will have no realistic impact on government revenue or the manufacturing sector. 

There are instances where if the right environment is created, the effect on revenue collection will be felt immediately.

Reducing the multiple taxes and levies that have become a common feature of devolution is one.

Others are reviewing our tax structures making them more flexible to accommodate the informal sector, thereby increasing the tax base. 

It is important to put into perspective proposed tax measures in past financial years to determine their sustainability in the long run if we are to realise our economic goals. 

Without this, the progressive tax measures in the Finance Bill will remain well-intentioned but have no meaningful or sustained effect on the growth of our economy. — The writer is Chairman, Kenya  Association of Manufacturers   — [email protected].