New VAT undermines Kenya’s food and nutritional security goals - Route to Food
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New VAT undermines Kenya’s food and nutritional security goals

New VAT undermines Kenya’s food and nutritional security goals

Kenya could be staring at a food and health crisis as low-income earners primarily working in the country’s large informal sector become more vulnerable to ill health and diseases associated with increased levels of hunger and poor nutrition, following the recent introduction of VAT on petroleum products, a new report has warned.

The report on the impact of VAT on fuel on food and nutritional security, warns that this tax is effectively a tax on everything. This results from the central role of transport and power as an input into the cost of virtually all products and services, as well as the direct use of fuel for cooking and lighting by the majority of Kenyans.

You can read the report here: Kenya Finance Bill 2018-Impact on Food and Nutrition Security.

The report commissioned by the Route to Food Initiative indicates that the government appears to have disregarded the intricate link between food and nutritional security and the health and wellbeing of the vast majority of Kenyans with modest incomes in its quest to raise more revenues through imposing the 8 per cent VAT on petroleum.

The removal of several items like agro-chemicals from the zero-rated list to the exempt schedule also essentially brought critical inputs in farming and food production into the VAT net. These tax increases will directly permeate into the costs of all products and in particular into the prices of food, fuel and household essentials.

Commenting on the report’s findings, Ms Layla Liebetrau, the Initiative’s Project Lead said: “There is already a nutrition quality gap that is occasioned by chronic and systemic hunger in the country. The VAT on fuel exacerbates the situation by further stretching food and health budgets, particularly amongst vulnerable Kenyans, which makes it hard for them to afford and access adequate food to meet their basic dietary requirements.”

She added that the report estimates that food intake for low-income earners may decline by as much as 16 – 20 per cent and such grim statistics not only lower the quality of life of millions of Kenyans but also impairs the country’s noble goal of being food secure.

While acknowledging that the options to remedy the situation in the short-term are limited, the report nonetheless proposes zero-rating petroleum products, a move that would partially help to minimize the effects of higher transport and power costs. Another option is to lower the standard rate of VAT on all products to 12 per cent, 8 per cent or even 4 per cent, which would effectively reduce the costs of essential commodities and food items such as maize flour and milk.

The latter option, the report noted, would be the best bet of balancing the government’s need for revenues from VAT with an efficient market that minimizes price distortions and anti-competitive practices. Needless to say, it is the government’s obligation to take actions intended to contribute to the progressive realisation of people’s right to adequate food by strengthening their access to and utilization of resources and means to secure their livelihoods.

“VAT is almost always a regressive tax as the tax burden falls disproportionately on low-income earners, the poor, the elderly and people living on social welfare transfers as well as the 83.45 per cent of Kenyans in the informal sector. This is consistent with the ‘telescoping’ effect of VAT which ripples through the supply chain of most products,” said Alexander Owino, a financial sector specialist and author of the report.

To put this into context, Mr Owino said the imposition of VAT, at any rate, however small, and irrespective of whether an enterprise falls under the exempt or zero-rated regime automatically translates into price increases to final consumers.

From a food security perspective, the situation is compounded by the reclassification of agro-chemicals and pesticides from zero-rating to exempt. According to members of the Agrochemical Association of Kenya (AAK), this measure will effectively increase the input costs to the farmer by as much as 50 per cent and may contribute towards making food more expensive.by as much as three times.

The prohibitive costs of agrochemicals that may result from the increased VAT, however, present an opportunity for the country to pursue alternative and sustainable farming and agricultural practices.

“The government should consider a staggered taxation scheme that reduces taxes for pest control products that pose a low risk for human health and the environment while gradually raising taxes on harmful chemicals. The effect will be to encourage the use of less harmful inputs and the promotion of organic farming,” the report noted.

Press release issued by the Route to Food Initiative 
Image: The New Tax Burden courtesy of Gado

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