Duty-free goods cost KRA Sh30bn foregone tax

KRA Commissioner General, Humphrey Wattanga Mulongo before the National Assembly Departmental Committee on Finance and National Planning at Continental House Nairobi on October 24, 2023. PHOTO | DENNIS ONSONGO | NMG

The importation of duty-free agricultural products denied the government close to Sh30 billion in taxes, reflecting the high cost of cushioning Kenyans against the steep consumer prices.

A report by the Treasury shows that tax expenditures, or foregone taxes, increased three times from Sh15.6 billion in 2021 to Sh45.5 billion last year after waiving duty on agricultural products.

Last year imports of animal feeds, vegetables, wheat, maize, edible oils, rice and sorghum, jumped 209 percent to Sh68.06 billion as the government put in place measures to lower the cost of living.

The largest increase on tax expenditure was on Import Declaration Levy (IDL), charged at the rate of 3.5 percent on all imported goods, which increased by Sh10.2 billion to Sh11.8 billion. In 2021, the government did not collect IDL valued at Sh1.6 billion.

Tax expenditure on import duty, which can be as high as 50 per cent on maize imported from outside of the seven-member East African Community (EAC) and the Common Market for Eastern and Southern Africa (Comesa), was Sh13.6 billion up from Sh4.8 billion.

Similarly, foregone taxes on Import value added tax (VAT) increased from Sh8.8 billion in 2021 to Sh17.2 billion in 2022, reads the 2023 Tax Expenditure Report.

Read: Tax-free essential good imports to fight inflation

“This increase is mainly attributed to the increase in the import VAT on oils. The shift in rates brought by the new EAC CET [common external tariff] and increased importation of duty-free maize, sorghum, rice, vegetables, raw materials for the manufacture of animal feeds and other foodstuff products also contributed largely to this spike,” said the Treasury in the report that provides information for tracking and evaluating tax expenditure.

Kenya, egged on by the International Monetary Fund and the World Bank, has been trying to reduce tax expenditures, arguing that some of the tax incentives do not deliver the desired benefits.

However, the recent drought and the global supply disruptions, first by Covid-19 and then the Russia-Ukraine conflict, forced the government to waive taxes on imports of select food products.

Consumer prices have been going up owing largely to the high cost of food and fuel.

For the poor, food can be as much as half of their income, meaning this income group is hit the hardest when food prices increase.

President Uhuru Kenyatta, who William Ruto succeeded last year, started by waiving taxes, fees and charges on maize and animal feeds in 2022, a move that contributed to increased tax expenditures on food imports.

Dr Ruto, who came to power in mid-September, allowed tax-free entry of white maize, rice, yellow maize, soya beans, soya bean meal, assorted protein concentrates and feed additives from March 17, 2023.

The waiver was granted in a bid to “bridge the food stocks deficit as well as lower and stabilise food prices,” according to Treasury Cabinet Secretary Njuguna Ndung’u.

Read: EU executive approves deal for Kenya duty-free access

Data from the Kenya National Bureau of Statistics (KNBS) showed that Kenyans have this year spent more money on importing food than capital goods such as machinery for the first time, underlining the impact of a prolonged drought and disruptions in the global supply chains that prompted the government to waive duty on key food items.

This financial year Kenya has got approval from the East African Community’s Council of Ministers to import wheat at 10 percent duty as opposed to standard 35 percent for the bloc, while that of rice has been slashed to 35 percent from 75 percent.

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