Higher taxes to dent firms’ profits this year, analysts warn

Analysts are warning that imposition of some of the tax measures as introduced in the Finance Bill raise a concern in the country’s economic growth, especially on corporate earnings this year with the main focus being on the telecommunication and financial services industry due to the increased excise tax on both money transfers and internet charges which could slow down consumption of these services.

In other sectors, consumers will also be faced with the additional taxes on fuel as well as the housing levy, which we believe will put a strain on overall consumption, Cytton Investments says in a weekly update.

According to Cytton, this is because consumers will have to rationalie their consumption on goods and services due to the dilution of their purchasing power, which effectively means a reduction in the quantity of goods and services a single unit of currency can buy.

“This will lead to reduced demand of goods and services across various economic sectors. We also expect inflation to rise in H2’2018 but a lower rate than earlier anticipated due to the halving of the VAT charge on fuel to 8.0% from the earlier 16.0%. Inflation is however still expected to be within the government set target of 2.5%-7.5%,” says the update.

In a chaotic special sitting last Thursday, the National Assembly approved deletion of Clause 18(b) of the Finance Bill 2018, which sought to postpone the imposition of VAT on fuel by another two years to commence in September 2020.

The President, who assented to the Bill on Friday, had argued that the postponement of the VAT charge on fuel would affect the estimated revenue targets for FY’2018/2019 creating a budget deficit that would require use of other measures to bridge.

He further proposed an amendment of the VAT Act 2013, to reduce the VAT charge on fuel to 8.0% from the earlier 16.0% which was passed by the National Assembly, to take effect upon enactment of the supplementary Appropriation Act and is projected to raise close to Ksh 35.0 billion in revenue.

The enactment of the controversial law will also see an increase on the excise duty charged on excisable value on telephone and internet data service to 15.0% from the earlier 10.0%, as well excise duty fees charged for money transfer services by banks, agencies and other financial services providers to 20.0% from the earlier 10.0%.

“Excise duty charge on other fees charged by financial institutions will also be increased to 20.0% from the earlier 10.0%. The imposition of these would replace the robin hood tax deemed more expensive and complicated to implement and the projected Ksh 20.2 billion revenue to be collected is set to be channeled to finance universal health care,” says Cytton.

In other measures, the President pushed for a reduction in the taxation on winnings under the Betting, Lotteries and Gaming Act to 15.0% from the earlier proposed 20.0% as per the Finance Bill which had been submitted to the President which was still a decline from the initial 35.0% in order to enhance equity and fairness by distributing the tax burden fairly between the winnings and the companies which is expected to have a net effect of encouraging players to continue betting on local platforms as the higher taxes would be punitive forcing players to bet on other international platforms. The National Treasury expects to raise revenue from Ksh 8.7 billion to an estimated Ksh 24-30 billion.

The Employment Act was also amended in a move that will see employees contribute 1.5% of the monthly basic salary while the employer will match the same amount provided that the sum of the employer and employee contributions do not exceed Ksh 5,000 monthly, payable to the National Housing Development Fund. The introduction of the contributory scheme is in a bid to support the housing pillar under the government’s Big 4 Agenda, which is set to enable contributors own houses upon the maturity of the individual schemes.

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An amendment to the Miscellaneous Fees and Levies Act provided for an introduction of an anti-adulteration levy on kerosene at the rate of Kshs 18.0 per litre of the customs value of kerosene payable by the importer at the time of entry of the kerosene into the country.

The National Treasury argued there was need to harmonise the prices of kerosene and diesel thus eliminating fuel adulteration that has led to pollution, damage to vehicle engines as well as adversely affecting government’s revenue.