Nairobi (Reuters) – Inflation rate is expected to fall to 9.16 per cent, returning to single digits for the first time in 16 months on the back of lower fuel prices and potentially paving the way for further monetary easing in the next two months.

Nairobi Treasury Building. Photo/Reuters

However, the gains from the falling rate could be eroded if Parliament passes a proposed amendment to the tax laws seeking to make it mandatory for consumers to pay VAT on foodstuff and other basic commodities, which are currently zero-rated.

A Reuters poll of 10 analysts conducted on Friday forecast the annual rate of inflation would fall for an eighth straight month and gave a median estimate of 9.16 per cent, down from 10.05 per cent in June. The data will be released on July 30.

The lowest forecast was 8.25 per cent and the highest was 9.50 per cent and analysts attributed the decline to a sharp cut in retail fuel prices this month.

The Energy Regulatory Commission cut the maximum price of a litre of super petrol in the capital Nairobi by almost eight per cent to Sh108.39, and reduced the maximum price on a litre of diesel by the same margin to Sh97.42.

Revision downwards

“The revision downwards will obviously filter into the costs of transportation and food. That could also have had an effect on food prices,” said Duncan Kinuthia, head of trading at Commercial Bank of Africa.

Fuel and transport costs are major components of the index used to measure inflation and affect the prices of other goods and services.

A jump in prices of basic commodities last year, accompanied by a steep weakening of the Kenyan shilling against the dollar, provoked public anger and prompted the central bank’s monetary policy committee to adopt a very tight monetary stance in the fourth quarter of last year.

But a section of MPs and other stakeholders have warned that the same public anger could be awakened if Parliament approves the proposed amendments to the VAT laws. On Friday about 30 MPs, who met in Naivasha asked Treasury to withdraw the proposal to allow for adequate consultations.

If the proposals, contained in the Value Added Tax (VAT) Bill 2012 sail through Parliament, Kenyans will also pay higher premiums for mobile phones, newspapers and books, which were previously zero-rated.

The Bill has already been tabled before Parliament and is awaiting debate.

“Cost of production of food will increase as the new law seeks to levy VAT on farm inputs such as machinery and fertiliser and on final products such as sugar, flour and wheat,” says David Nyameino CEO Cereal Growers Association.

Experts estimate the proposed law will raise the overall cost of basic foods by between 60 to 100 per cent because it is structured in a manner that affects the entire value chain from basic agricultural inputs like fertilisers to services such as transportation.

A vast number of products that are currently zero-rated will be standard rated once the law takes effect-meaning they’ll be liable to pay 16 per cent VAT. Other items in they include processed milk, rice, bread, wheat flour, maize flour, fertilisers, Liquid Petroleum Gas and computers.

Standard rated

“Reclassifying these essential supplies from zero rated to standard rated will result in an inevitable price hike. Zero rating is the only true way of ensuring that goods are provided free of VAT,” states audit firm Deloitte in a review of the proposed law.

Another notable inclusion that is set to make life harder for most consumers, especially those living in rural areas is the listing of kerosene and kerosene jet type, which are zero rated.

In the proposed tax regime, the purchase or importation of taxable goods and services will be subject to VAT in all instances regardless of its value to the public.

“The agri-business sector will bear the biggest brunt if the new Bill becomes law as it may cripple or even wipe out major investments as the sector is also vulnerable to fluctuations in weather patterns and other factors such as post-harvest losses and short shelf – life of foodstuff due to the high perishable nature of most agricultural products,” says Gerald Masila, Executive Director Eastern Africa Grain Council (EAGC).

Compliance cost

According to Finance Minister Njeru Githae, the changes were prompted by the Government’s inability to raise substantial revenue at low administrative and compliance cost. He also cites challenges of VAT administration and compliance and increasing backlog of refund claims as other triggers.

“The proposed new VAT law has addressed most of the administration challenges that have been facing taxpayers as well as tax administration. It has brought in new provisions in line with the international best practices,” said Githae in a presentation made to stakeholders earlier in the year.

EAGC says the government ignored stakeholder input.

“It is sad to note that stakeholders were called to a consultative meeting but their views have been dismissed.’’

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