Kenya’s National Treasury is considering introducing a 16 percent value-added tax (VAT) on bread and milk in a fresh push to boost revenue collections.

Treasury Cabinet Secretary Prof Njuguna Ndung’u said studies by government agencies had shown that the current structure, where VAT on bread and milk is zero-rated, had failed to cushion the targeted poor households and instead benefited the middle class, who have relatively high income.

Zero-rated goods are products considered necessary, such as food items, sanitary products, and animal feeds, and are exempt from VAT.

Zero-rating these items makes them more affordable for lower-income consumers.

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“When we started doing some simulation work, we realised that we could actually gain a lot. Once you have high tax rates, the political remedy is often to try and create a rebate or should I say create refunds for some of the institutions dealing with products that are related and being considered to be consumed by the poor” Prof Ndung’u said on Tuesday during the Africa Fiscal Monitor form organised by the International Monetary Fund (IMF).

“Total VAT collected in Kenya comprises about 40 percent of the total taxes, but 18 percent of it goes to tax refunds for products assumed to be consumed by the poor. When you look at those products, you realise 95 percent of refunds go to bread and milk. Who goes to the supermarket to buy bread and milk? We are not compensating the poor, we are compensating the middle class,” he said.

If this happens, Kenyans will witness a rise in the cost of the two commodities.

The minister said the government was exploring a mechanism through which consumers could lodge their refund claims directly to the Kenya Revenue Authority (KRA) using receipts generated at the point of purchase.

Personalised tax refunds

“We missed the boat somewhere. In this age of technology, we can decide that we are going to have personalised tax refunds through one’s receipts when we purchase things in the supermarket. Then we are going to compensate you directly and not through the firm,” Prof Ndung’u said.

It is a shift which would bank heavily on the rollout of the electronic tax invoice management system (eTIMS), whose deadline for onboarding is March 31.

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Last week, KRA announced the rollout of eTIMS Lite, targeting the mass onboarding of players in the country’s informal sector. The taxman rescinded its decision to exempt farmers and small businesses with an annual turnover of less than Ksh5 million ($36,363) from producing invoices through the eTIMs.

While unveiling a new eTims solution tailored for non-VAT registered taxpayers on March 11, the taxman said all persons carrying out business in Kenya will be required to electronically generate and transmit invoices.

In the Tax Procedures (Electronic Tax Invoice) Regulations, 2023, the KRA had listed supplies by businesses with an annual turnover of less than Ksh5 million ($36,363) among nine transactions that would be exempted from the electronic tax invoice in a move that spelled relief for farmers and small businesses.

“The following transactions shall be excluded from the requirement of an electronic tax invoice…supplies by a resident person whose annual turnover is less than five million shillings,” the Authority said in the regulations.

Other transactions were emoluments, imports, interest, airline passenger ticketing, accounting adjustments, fees charged by financial institutions, and services provided by a foreigner without a permanent establishment in Kenya.

According to the 2022 Tax Expenditure Report published by the National Treasury, the country missed Ksh119.98 billion worth of tax revenue through zero-rated items in 2022 alone, a 22.45 percent increase from the Ksh98.41 billion that was foregone in 2021.