white bread
Caption for the landscape image:

No bread? Let them eat cake: Why Finance Bill 2024 has sparked uproar

Scroll down to read the article

Sliced white bread. The cost of a 400-gram loaf of bread could increase by about Sh10.

Photo credit: Shutterstock

The National Treasury’s proposal to introduce a 16 per cent value-added tax (VAT) on ordinary bread has sparked outrage across the nation with many saying that President William Ruto’s government is out of touch with reality.

The Kenya Kwanza administration seeks to raise close to Sh302 billion in new tax measures to finance its Sh4.2 trillion spending plan for the 2024/2025 fiscal year amid growing public anger over multiple taxation, high cost of living, high cost of doing business and shrinking disposable income.

The Finance Bill 2024 has among other punitive taxation measures proposed to change the VAT status for the supply of ordinary bread from 0 per cent (zero rated) to 16 per cent effectively increasing the cost of a 400-gram loaf of bread by about Sh10.

If approved by parliament the proposed policy shift is set to hurt many households currently weighed down by the high cost of food, housing, transport and education and alienate millions of children from the breakfast table.

Tax experts at the consultancy firm Ernst & Young say increasing taxes could have adverse effects like reducing consumer spending, discouraging investments and exacerbating poverty if not implemented judiciously.

“However, a reduction in the tax rates translates directly to less government revenue but also puts more money in the hands of taxpayers, increasing their disposable income. In the long term business activity increases, companies hire more, who in turn spend more and this leads to economic growth,” according to the firm.

“The growth creates a larger tax base and generates higher total tax revenue.”

Expand tax base

The consumer lobby, Consumer Federation of Kenya (Cofek), says the proposed taxation measures are punitive and obviously counterproductive as no effort has been made to expand the tax base horizontally.

“It is only vertical which is meant to overtax poor Kenyans to finance the bloated government and its non-priority expenditures. No austerity measures and public wage bill cuts,” says Stephen Mutoro, Secretary-General Cofek.

“16 per cent VAT on bread is a shame to government for foregoing a policy to zero rate basic foodstuffs consumed by majority of Kenyans, poor and non-poor.”

The Bill has also proposed to amend the VAT status on the supplies of Gluten bread and Unleavened bread from ‘exempt’ to ‘standard rated’ where the supplies of these foodstuffs now attract VAT at the standard rate of 16 per cent.

If Finance Bill 2024 goes through we will go for maandamano: Azimio MP

The cost of financial services such as issuing of credit cards and debit cards, Telegraphic money transfer services, Foreign exchange transactions, including the supply of foreign drafts and international money orders, Cheque handling, processing, clearing and settlement, including special clearance or cancellation of cheques is also going to go up significantly after the VAT status of these services were changed from exempt to standard rated subjecting them to a VAT of 16 per cent.

Other financial service that will now be subjected to a 16 per cent VAT from exempt include Issuance of securities for money, including bills of exchange, promissory notes, money and postal orders, assignment of a debt for consideration and the provision of financial services on behalf of another on a commission basis.

According to the Kenya Bankers Association (KBA the increased cost of banking to customers will hamper financial inclusion efforts, particularly affecting low-income individuals and small businesses.

“Coupled with Excise Duty, the total taxation on financial services would reach 40 percent, from the current 15 per cent (excise duty only), significantly impacting affordability and accessibility,” says Raimond Molenje, KBA’s acting Chief Executive.

“Regarding foreign exchange transactions, the proposed VAT will widen the margin charged on FX transactions. This poses risks to economic growth by taxing export proceeds and hindering the competitiveness of Kenyan products, adversely affecting foreign investments in the country, reversing the recovery of the tourism industry, with long-term economic impact.”

According to KBA the imposition of Vat on foreign exchange transactions could further threaten the stability of the country’s foreign currency reserves and undermine efforts to strengthen the Kenya shilling.

“The VAT application on FX transactions would also result in increased costs, including fuel prices, reversing efforts and progress made in stabilising the cost of living,” says Mr Molenje.

Motor vehicle tax

The Bill has also proposed to introduce motor vehicle tax at a rate of 2.5 per cent of the value of the motor vehicle provided that the tax payable shall not be less than Sh5,000 but shall not exceed Sh100,000.

The value of the motor vehicle shall be determined on the basis of the make, model, engine capacity in cubic centimeters and year of manufacture of the motor vehicle.

An insurer of the motor vehicles shall collect and remit motor vehicle tax within five working days after issuing a motor vehicle insurance cover.

But it excludes ambulances, a motor vehicle owned by the national government, county government, Kenya Defence Forces, National Police Service, National Intelligence Service or a person exempt from tax under Privileges and Immunities Act.

Unequitable taxation systems led to a revolution in countries like France. The cause of the French Revolution between 1789 and 1799 was primarily onerous taxation of the commoners (Third Estate) — primarily the peasants.

The French society under the ancient regime was divided into three estates; the First Estate (clergy), the Second Estate (nobility) and the Third Estate (commoners). One critical difference between the estates of the realm was the burden of taxation.

The nobles and the clergy were largely excluded from taxation while the commoners paid disproportionately and oppressively high direct taxes.

The nobles were exempt by law and the clergy had purchased exemption by virtue of substantial ‘donations’.

“That anger about taxes was a factor in the revolution is not in doubt,” states a 2015 research paper by the City University of New York on Taxation as a Cause of the French Revolution: Setting the Records Straight.

The clergy and the nobility faced far lighter obligations to the state than those of the Third Estate.

Taxes fell most heavily on the Third Estate simply because they were the only group subject to the taille (state taxes) but the burden of the taille fell disproportionately on the rural masses of peasants due to the staggering number of exemptions for others.

Taxation burden was felt even more sharply by the peasants because neither the taille (state taxes) nor the other direct taxes were very progressive in practice and because most country dwellers lacked the money or power to manipulate the other direct taxes as easily as the nobles or the wealthy bourgeois.

Until the French Revolution, the French were subject in varying degrees to levies from three main sources: King, the Church and the Lord of the land.