Operators of public transport minibuses, locally known as matatus, said the new tax, even at eight percent, would hurt demand for their services, and called for its total removal.
“We can’t increase bus fare too much. No one will board the vehicle,” said Maxwell Njuguna, a driver who sat in his empty vehicle at a bus terminal in downtown Nairobi.
“The customers don’t understand and they quarrel with us. We are operating at a loss.”
The tax is part of a government bid to finance key priorities prudently while narrowing a fiscal deficit that the Treasury forecasts at 5.9 percent of economic output this year.
Like other frontier economies, Kenya has found it tough to secure external funding as emerging markets from Turkey to Argentina are buffeted by turbulence and tumbling currencies.
Kenya’s challenge was compounded by last week’s expiry of an International Monetary Fund stand-by loan arrangement for balance of payments support.
The fiscal deficit reduction targets were set by the IMF when it granted a precautionary credit deal two years ago that expired this month. Legislators must approve the VAT proposal before Kenyatta can sign this financial year’s budget into law.
Foreign investors are watching the events keenly.
“Kenya should be a country of concern for investors at the moment,” Charles Robertson, chief economist at Renaissance Capital, told a conference in Nairobi on Wednesday.
He cited the challenging external financing environment for frontier African economies and the risk that the shilling currency could weaken steeply in the near term.
The finance committee said in its report on the president’s proposals that the VAT measure is consistent with the government’s aim to avoid a huge funding gap in the budget.
The finance ministry had budgeted for 35 billion shillings ($347.74 million), which it expected to collect through the tax in the financial year to the end of next June, the committee said, adding the halved rate will allow the Treasury to collect 17.5 billion shillings.
Kenyatta said last week that further delaying the tax, which was passed into law in 2013 but never implemented, would compromise the government’s ability to fund planned social welfare and development programs.
The finance committee also supported Kenyatta’s proposal to increase taxes on some financial services.