VAT System in Kenya: Government's Cash cow

  

Date Posted: 10/26/2012 8:26:00 AM

Posted By: moff J  Membership Level: Silver  Total Points: 485

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It is early September. The country is Kenya. Everything seems normal but there is really a very big problem in the labour sector. Teachers’, Lecturers’, and doctors’ unions have all called their members to a nationwide strike to pressure the government to increase their wages. This comes only a few months after the government had increased the wages for the civil servants. Well, what that meant was the government wage bill was likely to balloon astronomically if it was to bulge to the demands of its workers. The government knows this very well and it is therefore very adamant to cave in to the unions’ demands. The Minister of Finance becomes one very stressed up person; having to explain that the economy not stable and that it is very delicate. He says that a destabilization of the economy would have dire consequences on the country’s growth momentum. However, the unions do not want to here any of this…

Flash forward a few weeks later and the government, after numerous consultations and sustained pressure from the striking workforce, cave in to their demands. The result: Shs.7.8 billion for the lecturers and Shs.13.5 billion for the teachers, backdated to July 1st 2012!!!
Where is the money going to come from?
This therefore brings into perspective the VAT tax system. Analysts argue that VAT creates a valuable source of income for the government especially in countries like Kenya where income tax bases are limited due to the high rate of unemployment.

The good thing about VAT is that it provides timely revenue for the government as VAT returns have to be filed on the 20th day of every month. VAT in Kenya is charged at three different rates i.e. standard rate (16 %), special rate (12 %) and zero-rate (0%). There are also VAT exempt goods

and services. It is these zero-rated and exempt goods and services that the government mostly targets when it wants to raise its revenue through VAT. This has a double-advantage to the government in that not only does it raise extra revenue, but also it reduces other expenses such as VAT refunds which can be quite substantial. Currently, the backlog of VAT refunds stands at Sh.20 Billion!

It is therefore evident that the government has a tough assignment. Due to this, it has to devise ways of meeting its expenditures without hurting the fundamentals of the economy. The VAT system is therefore proving to be handy for the government even as it tries to meet its targets. However, this is likely to raise outcry from the public since they are the ones to bear the tax burden if it is imposed and the politicians who are opposed to the VAT Bill are also reading mischief majorly because this is an election year. This leaves one wondering whether the government has explored all the other sources of revenue before running to the VAT coffers.

The VAT system is indeed an important source of revenue for the government. The government can manipulate it in any way it deems fit so long as it (the government) achieves its objectives. However, over-reliance on the VAT system is likely to hurt the welfare of the citizens of a country since the commodity prices are likely to be higher and businesses most of the times pass this cost to the final consumer. It is therefore up to the government officials to come up with other ways of raising revenues instead of running for the VAT even when the cost of living is high.

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