Will Slapping 16% VAT Cripple Growth of the Kenyan ICT Industry?

By Leo Mutuku
iHub Research
  Published 25 Aug 2013
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By Varyanne Sika If you bought your Lumia at KES 15,000 or your Intel phone at KES 11,000 count yourself lucky. After a recent enactment of a new law governing Value Added Tax (VAT) in Kenya, you should now expect to be buying the same Lumia from at least KES 17,400 or the Intel phone from KES 12,760. The VAT Bill was passed on the 6th August and assented to by the President on the 14th August. (Business Daily Africa) There is a general belief, informed by KRA reports, that large-scale tax evasion is costing the government up to KES 20Billion annually. Easing tax administration, through the VAT Act 2013, should ideally generate KES 10Billion minimum - according to government - to support the bulging government expenditure for the year 2013/2014 onwards. Simplification of tax administration however, does not necessarily guarantee increased collection. Therefore, slapping a tax increase on phones, for example, is more like a safety net for the government - a net that is costly to the consumers, the ICT sector and the government itself in the long run.
Mobile phones on display Mobile phones on display
  Kenya’s ICT sector contributed 5% to the growth of GDP in 2011-2012 from contributing 3.7% to the growth of GDP in 2010 according to the World Bank and as reported here. High pricing will reduce digital penetration and less penetration will reduce contribution to the GDP growth. That said, I believe that it is important to not look at the VAT bill in isolation because other tax measures will still impact heavily on the consumer and the producer. When President Kenyatta was Finance Minister in 2009, he stated the following: “Mobile telephones have become an essential aspect of our daily communication and transaction system. To make the telephone sets more affordable to wananchi and expand the subscription base, I propose to exempt from VAT, all telephones, for cellular networks or other wireless networks. I do hope the dealers in these products will pass this benefit to ordinary wananchi by lowering prices.” So outstanding was this feat that the Mobile World Congress (MWC) recognized the Kenyan government by awarding the International Government Leadership Award for Removal of VAT on ICT in 2010. According to the Mobile World Congress, “The economy of a country and its people benefit when the national regulatory framework stimulates competition and investment, enabling a thriving mobile sector to contribute fully to social and economic development.” The Kenyan government’s standpoint, which is reflected in the current ICT policy, seeks to:
  1. Facilitate sustained economic growth and poverty reduction;
  2. Promote social justice and equity;
  3. Mainstream gender in national development;
  4. Empower the youth and disadvantaged groups;
  5. Stimulate investment and innovation in ICT, and achieve universal access.
What changed? The IMF was not happy with the long list of tax-exempted goods; the Kenyan government had to make good on their promise to the IMF to ‘improve’ the VAT law. The government's  hopes to raise KES 10Billion from the law through supposed ‘improved administration of taxes’ may see the vision to make Kenya an ICT hub thrown out of the window. Youth and disadvantaged groups are not going to feel ‘empowered’ by an increase in mobile phone, computers and computer software prices. Investment and innovation in ICT is not going to be ‘stimulated’ if the infrastructure is crippled by a restrictive regulatory framework especially exemplified in an increase in cost of acquisition of these technologies. This law will potentially hurt the youth who dominate the startup ecosystem. People living in rural areas will also not enjoy this digital economy penetration, which boasts a 1.2% increase in contribution to the GDP for every 10% increase in digital penetration (GSMA). The ICT industry in general will experience drastically slowed down growth. The Consumers Federation of Kenya (COFAK) shared a presentation with the parliament’s committee on Finance Trade and Planning on the VAT Bill 2013. This article, sums up the negative impact this new VAT law will have on the underprivileged (in our case, focusing on startups). A joint statement by GSMA, Intel, Microsoft, Samsung, Nokia and *iHub on the VAT law, discusses further problematic areas surrounding the VAT law and the Institute of Economic Affairs briefly addresses the complexities and the grey areas in the VAT Bill. Some other people however speculate that smart phones will become cheaper despite the 16% VAT on previously tax exempt ICTs. Our current government was elected on the basis of "reducing the cost of living and sustaining the macro-economic momentum initiated by the Kibaki administration." It is rather ironic then, that the government through this bill proposes to make ICTs less affordable, even as it is spending billions on the important but (debatably) non-essential laptops project. In an attempt to provide for tax reforms, streamline the collection of tax and ostensibly “offering subsidies to the vulnerable and other target groups” (2A of the VAT Act) parliament has managed yet again to contradict government policies, laws and missions. If in looking at this law in isolation has caused a misunderstanding among us lay people, where is the Kenya ICT board (or now, the ICTA) to explain to us what this will mean for everyone in the short and long run? And as they explain this to us, could they also share their standpoint on the VAT law?    
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