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When taxes don’t make business sense

 When taxes don’t make business sense

For many Kenyans like me, incomes have stagnated, even regressed as inflation reduces the purchasing power of the shilling each day. A Kes1,000 note in July 2013 is today worth Kes548.60 in real terms.

With a scheduled touchdown of 12 midnight at the Jomo Kenyatta International Airport in Nairobi, I knew I will have problems finding my way to Ndenderu, Kiambu County, in the dead of the night. 

So upon getting that “Karibu nyumbani” alert from Safaricom, and going through the arrival immigration checks by tired-looking officers, I stepped out on the cold tarmac to get a taxi home.

“Boss, unaelekea wapi?,” a trio of taxi drivers, keen to secure a late-night deal, shove each other mobbing me at the arrivals section.

Years of technological advances and the rise of digital ride hailing applications have done little to change how Kenyan taxi drivers operate. They will haggle against each other for a client overzealously fighting for your luggage I was afraid they would rob me.

But having learned from the best—ploughing through legendary pickpockets and chaotic makangas at Machakos country bus stage—I ignore them. The assumption is that traditional cabs are expensive and it would, be more economical for me to turn to the apps, sampling between Uber and Bolt which is offering me a better rate.

But it is a cold freezing night for me waiting at arrivals and I imagine it would be the same for these drivers and I choose to give them some business. With the rising cost of living, I understand they can’t be at the airport braving the cold just to take any money. They only settle for a deal that leaves them smiling happily.

On my end I was also not going to let them charge exorbitantly for the short trip to Ndenderu, which I know with Kes1500 fuel, my small Vitz can manage effortlessly and offer me rides for another day or two within Nairobi.

I have lived in this city long enough to understand that bargains work. So, I offer to pay Kes1000 for the night trip to Nairobi’s CBD to one of the drivers.

He contemplates like a man who is not used to leave a deal on the table, but he counters, “gari yangu ni tank kubwa chairman. Hapo nitakuwa nimechoma sana. Haiwezi. Kama ni Kes1,500 ni sawa.”

If my income was growing at the mind-bending speed of which cost of living is surging, maybe, I would have accommodated him but it was not.

For many Kenyans like me, incomes have stagnated, even regressed as inflation reduces the purchasing power of the shilling each day. A Kes1,000 note in July 2013 is today worth Kes548.60 in real terms, eroding the buying power of the shilling. So, I had no luxury to engage him and declined.

The taxi guy tried to make mental calculation whether the trip made business sense, given the rising cost of fuel, parking, wear and tear and he decided it was not worth it.

He wanders away upon sensing that his persuasion is not working on me yet he can snap a quick deal from some wazungu standing by. At least, the mighty dollar in their pockets is worth a lot in shilling terms, I conclude.

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But this made me realize the silent impact of tax increases over the past couple of years. With the rise in several taxes over the last couple of years, many businesses have borne the rising cost of production afraid of passing it to the final product on fear they will chase the customers away.

Kenyan businesses have been very adaptive over the years cutting their own costs to keep customers coming while trying to maintain old prices.

But, increasingly, they cannot bear these costs anymore. And now, they have to either increase prices drastically or just shut down the businesses.

With thinning incomes since Covid-19, a cursory look on city roads shows that the use of small cars, which often have lower maintenance costs compared to larger vehicles, is on a steady rise. They require less fuel, smaller tires, and fewer parts, resulting in potentially lower servicing and repair expenses.

With smaller engines and lower fuel consumption, small cars typically require less frequent refueling. And this can help drivers save money on fuel expenses, especially during times of fuel shortages or when fuel prices are high.

They have also resorted to using hybrid cars that turn electric when stuck in traffic or they just switch off the engine to save on fuel.

While these coping strategies have worked, increasingly, drivers are now pushed so much to the limit they are foregoing certain trips, which do not make any business sense.

Today, taxi drivers in Kenya are becoming very conscious of their spending on gas and are dropping trips at a higher rate than before.  It is not hard to find a driver politely asking you to drop an online taxi request just because he has projected the margins to a certain destination are simply too small. 

According to the latest price review, a litre of super petrol is retailing at Kes182.70, diesel Kes168.40 while kerosene consumers are paying Kes161.13 per liter of the commodity in Nairobi.

One wonders how drivers will cope with the expected increase in fuel prices proposed in the Finance Bill 2023. I am sure my next experience with a taxi might be costlier as transportation costs in Kenya look set to rise even further, piling pressure on motorists, who will certainly pass on the hit to travellers and other consumers.

Pump prices are expected to hit nearly the Kes200 a litre mark if Parliament will vote to approve President William Ruto’s 16 percent fuel value added tax increase. A litre of super petrol will rise by an estimated Kes13.51 to Kes196.21 after the additional taxes while diesel will increase by Kes12.40 to Kes180.88.

“VAT at 16 percent will apply on petroleum products, which we expect to have a significant adverse effect on the cost of living taking into consideration Kenya’s dependency on fossil fuel and the already high global oil prices,” a tax alert note by advisory firm PwC says.

“This proposal is likely to impact the prices of transport and production of goods,” analysts at KPMG explained, adding that the move will have the effect of “increasing the inflationary pressure in the economy.”

A rise in the cost of fuel will further squeeze budgets for Kenya’s middle class, the bulk of whom use cars to drive to offices or use vehicles to move from place to place selling merchandise or offering services.

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The country’s inflation dropped to 7.9 percent year-on-year in April from a higher 9.2 percent a month earlier, the latest update from the Kenya National Bureau of Statistics shows.

In the same month, however, a key survey by Stanbic Bank revealed that activity across Kenya’s private sector dipped as both the manufacturing and services sectors slowed partly due to inflation manifesting in high food and fuel prices.

Transportation providers often pass on the increased fuel costs to consumers. This can result in higher fares for public transportation, increased shipping charges for goods, and elevated prices for taxi or ride-hailing services. As fate would have it, consumers look set to pay more for their transportation needs.

High transport costs due to increased fuel prices will contribute to inflationary pressures in the economy. When transportation costs rise, businesses pass on the additional expenses to consumers, leading to higher prices for a wide range of products and services.

Higher transport costs will also have broader economic implications. Industries heavily reliant on transportation, such as manufacturing, agriculture, and retail, may face challenges in maintaining profitability. Increased transportation costs risk cutting profit margins, limiting business expansion, and potentially resulting in job losses.

The looming higher fuel costs will be coming at a time when the economy is already in distress. The Stanbic Bank Kenya Purchasing Managers’ Index (PMI) decreased to 47.2 from 49.2 reported in March. PMI readings above 50 point to growth while those below is a signal of economic deceleration.

As the clock ticks towards 12:30am, a call comes in and an Uber driver is ready to take Kes1,070 to take me to Nairobi CBD where I will decide on how to proceed to Ndenderu. During peak hours, matatu fare to Ndenderu averages Kes100 but on this night I am forced to part with another Kes850 for an Uber ride.

One only hopes the government will rethink these new fuel taxes and according to Pricewaterhousecoopers (PwC) the government is likely to walk back on the proposed increase in fuel tax after consultations with stakeholders, a trend seen over the past few years when the tax faced huge opposition on the impact of higher petroleum prices on cost of living.

VAT tax law was reviewed in 2013 to simplify the tax regime by eliminating lower rates and charging a standard 16 per cent rate or zero rating.

The 2013 law exempted petroleum products for a transition period of three years which was subsequently extended to 2018.

Implementation of the 16 percent rate on petroleum at the end of the transition period led to widespread anger that prompted former President Uhuru Kenyatta to offer a 50 percent cut on fuel VAT as a compromise.

Kenya introduced VAT on petroleum products in the Finance Act 2018 at a rate of eight percent with the aim of cushioning the economy from an adverse effect of the government’s move to slap VAT on petroleum products. Its implementation was, then, suspended until July 2021.

Government is likely to compromise given indications in the draft National Tax Policy where the Treasury is seeking to set the minimum value added tax rate at 12 percent.

The Treasury said charging fuel at eight percent and other goods at 16 percent has created an undue advantage over other products, as it proposed that all goods should be taxed at 16 percent and preferential rate should not be lower than 12 percent.

The government may also have to revise the tax if the impact is too heavy on Kenyans leading to political pressure and possible unrest or when collections reduce as a result of raising the taxes.

Rise in the cost of liquid petroleum gas after the VAT was introduced has led to substitution with dirty fuel such as charcoal against the government ambition to switch to clean sources of energy. 

This has seen the government propose exempting LPG from VAT in a give-and-take strategy, as the Finance Bill proposes a tax measure that could encourage the use of LPG, a cleaner source of energy that is healthy and environmentally friendly.

In FY23/24, the elimination of VAT on LPG will lead to a reduction in product cost, making it more affordable to a significant number of Kenyan households.

“By exempting VAT on LPG, it is expected that this will impact the household cost while at the same time, positively impact the climate. However, any input VAT incurred by the suppliers of LPG will become a cost and this may be passed on to the consumers negating the much-needed relief,” KPMG warns.

jwambua@maudhui.co.ke

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