How to adjust airtime balance after VAT rate change

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

12 April 2020

Two questions disturbed me this week: first, why do we call the balance in our mobile phones “talk time” yet it is in shillings and not minutes or seconds? Secondly, what can you buy with one shilling?

I posted the second question on my Twitter wall and my followers informed me that that one chilli goes for one shilling in most markets around Nairobi. Now, considering how many chillies are produced by a single plant, it makes me wonder why more people aren’t growing these “fruits” instead of loss-making ones like coffee…but I digress…

This answer is going to help in understanding how changing the VAT rate from 16 to 14 percent is going to affect telephone airtime. The challenge is that, in Kenya, we don’t buy minutes; we top up shillings and we consume them as we talk depending on the price per second.

So the question is: how much airtime money should a customer be added when the VAT rate changes from 16 to 14 percent? Before going into that, perhaps I should explain why it is necessary to add the balance.

The new rate took effect on April 1, 2020. At the turn of that date at midnight, many customers had unused airtime balances in their telephone lines. These had been purchased on the understanding that the VAT is 16 per cent.

If the telephone company was selling minutes, it would have been an easy problem: just add more talk time to the customers. But, as it is, we don’t buy minutes in Kenya.

To understand how the calculation should be done, we think of a product that costs one shilling per piece; for instance, chillies. Suppose that that this price includes VAT.

Before 1st April, the cost of 100 chillies was Sh100. But since this already had 16 per cent VAT, the pre-tax cost was Sh86.21. I have explained how to that work this out in the past: we divide the Sh100 by 1.16.

It would be wrong to subtract Sh16 from Sh100. That gives an answer of Sh84; but when you add 16 per cent to Sh84, you get Sh97.44 instead of Sh100!

Going back to the chillies, the pre-tax price is Sh86.21. Now that the VAT rate has been changed to 14 per cent, the net cost of 100 pieces comes to Sh86.21 + 14 per cent = Sh98.28.

In other words, the price of each chilli is Sh0.9828. So, if you had paid Sh100, how many chillies should you get? The answer is simply Sh100 divided by Sh0.9828; this comes to 101.75 chillies.

Unfortunately, I have never seen a market where fractions of chillies are sold! So, the number should be rounded upwards to 102 chillies.

I think this is what Safaricom did when they announced that, due to the change in the VAT rate, they would add every customer two shillings for every Sh100 balance. It is like getting two chillies for every Sh100 paid.