Why inflation adjustment should not be implemented » Capital News

By Anthony Mwangi

The Kenya Association of Manufacturers (KAM) identifies with the current government’s manifesto: The Plan – The Bottom-Up Economic Transformation Agenda 2022 – 2027. The Plan recognizes and appreciates the challenges that Kenyans face on a daily basis, especially the cost of high life.

The plan demonstrates the government’s deep understanding and commitment to developing durable solutions for all. KAM remains committed to working closely with the government to transform the economy.

The plan singled out regressive taxation, bureaucracy and regulatory compliance costs as the biggest hurdle to Kenya’s exit from the “economic hole” we currently find ourselves in. The starting point of the economic transformation journey is the commitment to review and streamline all business licensing. cap the total cost of licenses at 1.5 per cent of turnover royalties.

As rightly stated in the plan, the enactment of an administrative burden law analogous to the US Red Tape Reduction Act will ensure that no company spends more than four man-hours per month on tax compliance and regulatory.

Over the years, the ease and cost of doing business in Kenya continue to be significant barriers to economic prosperity. Specifically, the hash tax regime is a “zero-sum game” that has shifted manufacturing to our East African Community (EAC) neighbors who now export to Kenya. Unfortunately, as they implement the government’s economic plan, Kenyans now face a new regressive tax challenge – proposed adjustments for inflation on specific excise duty rates.

The Kenya Revenue Authority (KRA) has advised manufacturers, importers of excise goods and members of the public that they must adjust excise duty rates on the following products: petroleum products; motorcycles; alcoholic and non-alcoholic beverages, including bottled water; beauty products; SIM cards (which were only listed as excise less than three months ago); confectionery; tobacco and nicotine products; and raw hides and skins. Taxes on these products will increase by 6.3%, the average inflation rate for the financial year 2021/2022, as determined by the Kenya National Bureau of Statistics (KNBS). The new rates will come into effect from October 1, 2022.

The Finance Act 2022 increased excise duty rates by 10% and 20%, effective July 1, 2022. A further increase of 6.3% within three months will result in a massive cumulative tax increase of 16, 3% to 26.3% in one year. Such an increase will have a significant impact on the mwananchi, who are already burdened with the ever-increasing cost of living. The cost of raw materials and intermediate inputs has increased by 15 to 20% due to the increase in world prices of raw materials.

In addition, import costs have increased due to the weakening of the Kenyan shilling. Fuel prices have also reached an all-time high, with much of it made up of taxes and levies, leading to a high cost of distribution and further increasing the price at which a consumer buys the locally produced product.

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The inflation adjustment will also stifle small and medium-sized enterprises (SMEs), which are the backbone of job creation and our economy as a whole – SMEs are one of the main focus areas of the government. The proposed adjustment will stifle their growth due to reduced cash flow as they will be forced to absorb the inflation adjustment to stay in business.

The implementation of the tax increase runs counter to the government’s intention to reduce the cost of living, support agriculture across agribusiness value chains, support the growth of SMEs and create jobs for Kenyans, especially the youth. The inflation adjustment is being considered despite several court cases challenging KRA’s application of the previous inflation adjustment made under Legal Notice 217 of 2021. The notice sought to adjust the inflation rate. excise duty inflation on excise goods of 4.97%.

We ask the government to stop implementing inflation adjustment as it is unsustainable. Since 2018, the cumulative increase in annual inflation has increased to 26.56%. Therefore, SMEs, among other manufacturers, might not be able to survive if the annual rate of inflation adjustment continues to increase every year.

The government should develop policies with long-term economic goals rather than short-term goals aimed at increasing revenues without considering the impact of these policies on citizens and the economy.

The author is the Managing Director of the Manufacturers Association of Kenya and can be contacted at [email protected].

Eleanor C. William