Thursday, June 15, 2006

Budget 2006/07

To gauge the importance of the budget speech given today, it is useful to look at 2005/06 budget speech from last year. Minister Kimunya gave his first budget speech as Minister, which was a progression from his predecessor, Minister Mwiraria who resigned at the beginning of the year.

He has several popular positions: He will have correctly read the mood of the country leading to the 2007 elections, the resentment the public has for ever fattening MP allowance packages, and also noticed the Rwanda example in cutting back on government limousines, while at the same time having to keep the government moving on taxes, without factoring in donor support. Again, he depends on Parliament to pass several bills to enable the government to meet its goals.

Economy
Has grown for 3 straight years, hitting 5.8% with 460,000 new jobs created last year. That statement by the Minister produced groans from MP’s within the first 2 minutes of his speech prompting Speaker Kaparo to ask them to wait and comment on the truth of that statement later. The Minister however noted that the rich - poor gap was unacceptably high. He called on the private sector to lead economic growth while admitting that the government had gotten embroiled in some scandals, from which they had learnt their lesson.
Outlook GDP to increase by 5.8%
Jobs 1.4m new jobs created over the last 3 years
Inflation
- T-bill rates stable at 8 to 8.5%, even though the trade deficit has widened
- He expects inflation to decline to 5% by year end from 13% in May
- Government will stick to the 29.5 billion shilling borrowing limit
- Increase money supply by 10% by next June
Alleviate poverty: Budget allocation to health, agriculture, rural development, education and infrastructure sectors combined increased from 60.7 to 62.7% and to 66.5% next year.
Taxes, not Donors: As with Mwiraria, he is not factoring in donor funding. Therefore it’s importance to maintain revenue growth (i.e. though taxation). He also thanked taxpayers for their contributions several times during his speech.

Investors
Bonds and the NSE
- Country will fund infrastructure projects through bonds
- The government will encourage parstatals with good cash flows to develop bonds to support their funding requirements
- Asset backed securities for infrastructure will be exempt from income tax
- All listing costs on the NSE to be tax deductible
- Exempted interest income for bonds for infrastructure and social services with at least 3 years maturity
- Also tax deduction to support the creation of ESOP’s. (Employees ownership programs)
- Dividends unclaimed after 7 years will be transferred from companies back to the CMA investor compensation fund – from where investors can claim it if/when they ever resurface

Real Estate Property owners took a major hit with the government now re-introducing capital gains tax on the transfer of property. However generous deductions were put back for 1st time home owners and mortgage buyers.

Member of Parliamnent
Happy
- CDF up by 40% from 7.2b to 10 billion per year. This is an increase from 2.5 to 3% of national collection (but much less than the 7.5% MP’s are demanding)
- LATF will increase and each constituency will have about 40 – 50m each year with about 11m for roads (and MP’s are in charge of this). They will also get extra funds for bursaries and police stations.
- The minister advised MP’s to use the funds carefully as it will affect how they will be judged by their constituents in the 2007 elections
- Funding for political parties allowed
Sad
Their salary and entertainment allowances in addition to that of other constitutional office holders will now be taxed.

Government spending
- 461b budgeted (26% of GDP) for the year and Kimunya called on officers to use scarce resources efficiently
- 2/3 of the wage bill goes to health and education
Monster trucks banned
- New transport policy for public service goes into effect on July 1 which will reduce cars pools expect for key sectors such as police and health
- Ministers, their assistant and permanent secretaries will have just 1 official car
- No use of official vehicles to and from duty (wheelbarrow maybe?)
- The Government will dispose of extra vehicles by 30 September
- No provision for purchase of motor vehicles this year – and constitutional offices must first get approval from treasury

Banking/financial sector
- Government intends to reduce discrimination in the sector by amending the banking act. This will allow for institutions like Muslim banks which will lower the cost of banking
- He will create an independent insurance authority
- He will also create an independent authority for micro finance institutions
- The central bank of Kenya (CBK) will have an independent chairman – and the governor (who currently chairs the board) will be an ‘MD’ who is answerable to board
- Lease financing: Generous waivers wer given for this, but still subject to withholding tax

Privatization
In 2006 - 07 the government will;
- Restructure and privatize Telkom and NBK
- Sell government shareholding in Mumias and Kenya Re
- License a second national telephone operator and other gateway licensees
- Concession the Mombasa port

Corruption
- Government will hire more lawyers
- National anti-corruption plan to be launched next month with measurable indicators
- Findings and recommendations on Anglo Leasing and Goldenberg investigations to be implemented

Improve Business
- KPA, KRA, KBS and Police will now work 24 hours at the port of Mombasa to ease congestion
- KPA, KRA, KBS license costs to be rationalised
- Of the existing 1,300 business licences, 150 to be eliminated and 700 simplified.

Taxation
- reduced VAT burden – any business with a turnover of less than 5 million is exempt from VAT registration
- monthly allocation for VAT refunds will go up by 46% to 900m which should cover legitimate refunds
- priority will be given to businesses who are electronic tax register (ETR) compliant. Also companies not ETR compliant after December 31 will not be allowed to recover the cost of installation from VAT and will have to foot the bill for ETR
- He will curb fake refund claim by penalising a person twice the fraudulent claim lodged and a 3 year prison term
- Motorists: No more road licenses for vehicles. This tax will be recovered from fuel charges effective tonight

Infrastructure
- Quarterly reports will be given to the public on roads progress
- 3 new roads bodies created
- Set standards for road construction and contractors who don’t meet this will be blacklisted

Sin Taxes
- All up are tax up on portable spirits, excise tax on wines and spirits and excise tax on malt beer However Excise tax removed on non malt beers i.e. Senator which will cost as little as a soda.
- Cigarettes tax up by 10%

Insurance
- Insurance tax down
- Limit to be set for accident compensation
- Brokers to remit cash immediately to insurance companies

Others
Kenyans Emigrants will be allowed to collect their full retirement benefits when they leave the country. The rest of us have to wait till 55 years to access employer’s contribution to our pension.
- bread zero rated wheat flour which should lower the price of bread
- mothers zero rated diapers napkins feeding bottles
- bicycles zero duty on unassembled bicycle imported by local assemblers. Also reduced duty on assembled ones (and motorbikes ) from 25% to 10%
- solar No import duty on solar equipment (including batteries). Also removed duty on energy saving bulbs
- computers Removed VAT on computers, parts and accessories.
- agriculture Zero rated tractor tyres and parts, transportation of agricultural produce. Also Sugar levy burden will be borne by growers not consumers after January 1. This will make cane growers more vigilant on the use of the funds.
- Youth Increased allocation for the youth ministry, polytechnic and the NYS. Also 1 youth polytechnic will be set up in each constituency
- Entertainers Kenyan ‘artistes’ in sports, music, and drama are exempted from paying VAT.

13 comments:

Afromusing said...

Am happy with the no import duty on solar panels and batteries. Commendable.

Kabinti said...

athanks for posting on the budget. Really if it wasn't for your blog i wouldn't have paid attention to it.

Prousette said...

I wonder if the price of bread and wheat flour would go down overnight.

Not too sure of our beloved MPs acepting to go home with less than they have now fingers crossed for this one.
excellent summary, thanks.

Kagz said...

@ Prousette

I can almost bet the price of bread will neither come down overnight nor any time soon.

Budget price increases result in overnight increases. Price decreases take a while or never happen.

Thats my 2 cents coz i've worked in retail in Kenya.

Mimmz said...

Nice budget. Well thought out. Shows vision for development and compassion for the needy areas.

Bankelele, thanks for the very simplified, easy to read breakdown

coldtusker said...

@Banks - Thanx.

@prou - In fairness the bakers need to use up the "old vat paid" flour BUT ultimately its not taxes but competition that brings prices down.

The real question is whether - ffter factoring in inflation (officially at 13%) - the increase in the price of bread lag inflation?

Reducing listing costs by the CMA & NSE should be next to encourage additional listings. Allowing listing costs to be expensed is a good move.

The bills have to be passed by MPs. They will probably remove the "tax" provision as relates to their fat salaries & perks.

Wangu said...

It's all been said, Banks. Kudos on a job well done, as usual.

I'm not holding my breath for MPs to cut their expenses ... but I'm putting my voter's card on the ready!!!!

BizKenya said...

Kimunya is emerging as the only Finance Minister shifting from tradition.
He isnot a captive of the past and if he were to hold the position for another five years and implement his proposals, he will have become the highest rated Finance Minister inKenya

bankelele said...

Afromusing: Commendable, but I wish more afforbale solar products could be developed and introduced here

Kabinti: We all need to pay more attention to Parliament (mzalendo.com)

Prousette: See Kagz comment "Budget price increases result in overnight increases. Price decreases take a while or never happen."

Kagz: There was a shopkeeper on TV last night saying prices of diapers and napkins will come down only after he exhausts his current stock in a few weeks!

Mimmz: Well thought out budget, implementation is the hard part

Coldtusker: Not enough about the CMA & NSE this time, but last budget had a few incentives.

Wangu: 'smart' MP's should see the growing resenement the public has with them and comply

BizKenya: The whole team at Treasury has always attempted some new things but with a new Minsietr at the helm, things are now happening.

The.Hanyeé said...

Bankman,

Asante for summing up what always seems like the most boring Thursday afternoon ever into sthn we can actually take and run with.

Correct me if im wrong, but hadnt computers been zero-rated already? Ama that was just duty and not VAT?

Wonder how many "celebs" will claim they are "artistes" so as not to lipa VAT..hehehe....

Shiroh said...

The mwananchi seems to have gained a lot in this budget.

Kagz said...

@ Banks,

Despite what the shopkeeper said, as Cold tusker said, its competition that brings prices down. The bigger stores (Nakumatt & Tusker) will defn. reduce prices almost overnight but the kiosks & neighbourhood stores are never in a hurry or may never do so.

Just like hanyee asked ..."hadnt computers been zero-rated already? Ama that was just duty and not VAT?"


Thanks for the Budget Summary & have a great w/kend

coldtusker said...

Computers - Apparently duty was suspended 2-3 years ago but VAT was applicable @ 16% until yesterday.

CAREFUL - Computer equipment taken for granted e.g. external drives, flash disk, etc may still be charged VAT... So if u bring a computer into Kenya with a spare battery... they will whack VAT on the battery!

The spineless KRA couldn't go for the arturs who shoved a gun into their faces but will come after the mwanainchi who brings in a computer battery!

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