Relief as VAT is Retained at 16 Percent

Kenyans have every reason to smile after the National Treasury decided to maintain the Value Added Tax (VAT) at 16 percent.

This came against the suggestions by the Institute of International Finance (IIF) to raise the VAT rate to 18.0 percent to match VAT charged by other East African Community (EAC) countries.

The tax rise would be in line with plans to reduce the country’s budget deficit through increased tax collection and reduced recurrent spending, as recommended by the International Monetary Fund (IMF) in March, and in turn, reduce public borrowing.

This comes after the decision to introduce VAT on petroleum products in September 2018, in a bid to increase revenue collections and reduce the budget deficit in the next fiscal year.

“This is a good decision since it is meant to cushion consumers from a rapidly rising cost of living and possibly maintain Kenya’s trade competitiveness,” said a report from Cytonn Investments Limited.

The Treasury however still needs to maintain the path towards fiscal consolidation by reducing the budget deficit.

This will be achieved through:

• Reduction in expenditure, especially recurrent expenditure, and the rising public wage bill,
• Increased revenue collection through either improved administrative efficiency in the tax collection process by the Kenya Revenue Authority (KRA), widening of the tax base to include the large informal sector, increased tax rates, or a combination of all

• Privatization of some of the state corporations to realize cash and increase efficiency.

Rates in the fixed income market have remained stable as the government rejects expensive bids. The MPC met on 19^th March 2018 and lowered the CBR by 0.5 percent to 9.5 percent from 10.0 percent.