A bus load of politicians were driving down a country road one afternoon, when all of a sudden, the bus ran off the road and crashed into a tree in an old farmer’s field. Seeing what happened, the old farmer went over to investigate. He then proceeded to dig a hole and bury the politicians. A few days later, the local sheriff came out, saw the crashed bus, and asked the old farmer, “Were they all dead?” The old farmer replied, “Well, some of them said they weren’t, but you know how them politicians lie.”
Last week, I started a brief lesson for the 349 members of parliament who were out of office when Tornado VATA hit Kenya, leaving behind catastrophic destruction of the ordinary mwananchi’s cash flow in its wake. Just in case you missed it, Tornado VATA was the VAT Act 2013 that blew through parliament completely unnoticed by its most honorable occupants a few weeks ago. So to my dear parliamentarians, here is another thing you missed while you were away. You significantly hurt the Kenyan farmer and consequently hurt the ordinary mwananchi as you snoozed during the passing of the Act.
I’ll start with the basics. A farmer rears animals that are converted into food -fresh meat- or that produce milk or eggs for example. In order for those animals to create the end product, the farmer has to feed the animals with animal feed especially where he is into commercial production. That animal feed usually consists of about 80% of his production costs. Let me make it a little simpler. That chicken drumstick, T-bone steak or pork sausage that you are going to eat in the parliamentary restaurant today originally came from an animal and not from a supermarket. There are various costs that are borne by the producer of the meat you are about to eat which you need to know about. One of those costs is VAT which is discussed in terms of output and input VAT to those who are in the production of goods and services.
There are three kinds of VAT outputs. Remember that an output is what you charge your customer for purchasing your goods. (ermm when I say “You” I mean the person selling the goods and not you Mr. MP, as you clearly do not sell anything other than your dashing good looks and incontrovertible charm both of which certainly do not attract VAT).
Firstly, your goods can have a 16% VAT output, which is simply 16% charged over and above what the price of the goods is. Secondly, your goods can have a zero rating VAT output, which means that your goods attract a zero rate of VAT. However, zero rating allows for you the seller to claim back from KRA whatever VAT you have paid in the raw materials or input used to produce your goods, known as input VAT. KRA, in its undeniable generosity, allows you to make this claim and then spends the rest of your uncertain life assuring you that you will be paid the refund claim. In the meantime, your buyers get to enjoy your zero rated goods without paying for the 16% input cost which you endured when you purchased the raw materials because you are an honest business man who won’t pass that cost through to your customers and you await your KRA refund fervently. Thirdly, your goods can be VAT exempt. This means that you do not charge VAT for your goods (Amen to that!), but neither can you claim the input VAT that you paid for the raw materials that you purchased to make your VAT exempt goods (Ouch!). Of course, the result is that you include that input VAT into your total cost of production. Tornado VATA shifted a whole bunch of items from zero rated status to exempt status such as medicaments, fertilizers and sanitary towels, so guess where the input VAT costs for the manufacture of those items will go? To the shelf price of those items.
Let me take a break from all the technical gobbledygook before I lose you entirely. The chicken that you will have for lunch today will cost more to buy simply because the price of the animal feeds that were used during the chicken’s ill fated and very short life have increased therefore making for a more expensive production process. The animal feeds costs have gone up because the main raw material in the feeds which comes from millers is now being charged 16% VAT, which was previously not the case as the millers products were zero rated. The cherry on top of that cake is the fact that animal feeds, which were previously zero-rated now attract 16% VAT. So there’s a double whammy for the farmer: The raw material cost of the feed has gone up, as has the final product – the animal feed- gone up as it now attracts 16% VAT.
And since the farmer’s output is unprocessed meat and unprocessed milk – both of which are VAT exempt – the farmer cannot claim the input VAT that she has paid on the raw materials such as the animal feeds which make up about 80% of her costs. So she has to pass through the incremental costs to her buyers. The result, more expensive unprocessed meat and unprocessed milk. The more expensive unprocessed milk is purchased by the dairy producer who processes it and – drum roll please – sells it to us as processed milk with the new added tag of 16% VAT.
Look, I know your eyes are glazing over at this number 16 that I keep thrusting before you. Snap out of it. Life got very expensive while you were away Mr. MP, and you can never ever deny that you were not aware it would happen. I know what kept you busy though: 16 more cars in your garage; 16 more fuel allowance requisitions to submit and 16 more committee sittings to attend to. What’s that? I’m talking lies? I’m not the politician, you are!