Under the theme of ‘Kenya’s tax regime and the competitiveness of the Manufacturing Sector’, the annual CBA Economic Forum painted a vivid picture of the state of the country’s manufacturing sector and the impact of the current tax regime on its performance. Currently, in its second year, the Economic Forum is an initiative of the Commercial Bank of Africa, which brings together the government and industry stakeholders for a conversation meant spark economic thought leadership and inspire action.
This year’s edition was headlined by the Cabinet Secretary Ministry of Industry, Trade and Cooperatives Adan Mohammed. He pointed out that in his interactions with the private sector, many of the industry players don’t ask for tax reductions. Instead, the private sector desired a predictable tax regime that could allow for future planning of investments, a friendly business environment and ease in doing business.
He singled out government initiatives meant to improve the business environment including ongoing infrastructure development. “The government has made investments in roads, rail, the port facility, and energy supply; all towards improving our competitiveness. Some of these projects are just beginning to come on stream and the full effects have yet to be realised, we are confident that the benefits are yet to come,” he said.
As part of an expert discussion panel at the event, Ms Flora Mutahi, the Chair of the Kenya Association of Manufacturers (KAM) gave an industry-insider perspective of what aspects of the economic climate manufacturers are grappling with.
Big Four Agenda meagre Allocation to Manufacturing
The Big Four Agenda is Kenya’s development focus for the next five years and it includes manufacturing, universal healthcare, food security and nutrition, and affordable housing. However, out of a Ksh. 460 billion budget allocation to the Big Four Agenda, only 2.2 % went to manufacturing. This is despite a 15 % contribution to the GDP target placed on the manufacturing sector, which according to Ms Mutahi shows that expectation has been placed on the private sector to drive the country’s manufacturing.
Demands by Manufacturers
Kenya’s manufacturers had requested a reduction in power tariffs from Ksh. 16 cents to Ksh. 9 cents per kilowatt-hour. According to Ms Mutahi, in a typical power bill, 40 % are taxes and 60 % is the actual power charge: the proposal given to the government was for it to absorb the 40 % tax and let manufacturers only pay 60 % of the bill. However, this was made difficult by the fact that the country in debt, and of commitment to projects like the rural electrification programme. Ms Mutahi’s recommendation on power costs is for the government to weather short-term losses to enjoy long-term gains in the economy.
Taxes Hurting Kenya’s Manufacturers
The sin tax, which is traditionally used to deter people from engaging in harmful activities (common on tobacco and alcohol) is now used to collect revenue. It has moved to affect products previously not considered harmful, “The tax has now come into confectionery under the guise of health, which has really upset a lot of our manufacturing and it is very discouraging,” said Ms Mutahi.
On the other hand, withholding tax, which is meant to ensure Value Added Tax (VAT) reaches the government, is charged on traders supplying goods to appointed agents (government parastatals, financial institutions etc.). For example, when a manufacturer supplies goods to a parastatal they are paid less the VAT. However, to prevent double VAT taxation, the manufacturer is issued with a withholding VAT certificate to claim back the amount. According to the KAM chair, this has forced manufacturers to hold more working capital to offset the amount withheld. Additionally, the tax now applies to foreign ships, which Ms Mutahi says is likely to be loaded to the cost of importing goods. On the other hand, for exporting companies, there is no clarity about how they can get it back their withheld tax.
Ms Mutahi also raised the issue of tax administration under the mandate of the Kenya Revenue Authority (KRA). Particularly is the case where importers of steel are exempted from duty if it used within 9 months. However, what happens on the ground is that KRA would estimate the amount of stock to charge duty on and then promise to verify at a later date. This has the effect of forcing manufacturers to keep on putting more money into the business than they would need to.
Tax on the Informal Sector
Mr Fredrick Omondi, Tax Partner Deloitte Kenya pointed out a trend of taxing the same group of people; private sector and individuals with high income while ignoring the informal sector. He mentioned initiatives like the turnover tax, which intended to close that gap but didn’t work out well. It is estimated that Kenya’s informal sector employs up to 80 % of the country’s working population, however, tracking its income for taxation has proved a challenge. To capture small and medium-sized enterprises operating outside the tax net, the government has proposed the introduction of presumptive tax, which establishes an average amount to charge taxpayers without looking at books of account.
The second edition of the CBA Economic Forum brought to surface critical tax issues, which if addressed have the potential to make the Kenyan market much more attractive to investors and create jobs in the process.
Gabriel is an entrepreneurship enthusiast, with a fondness for questioning the workings of everyday things. He is an entrepreneur, a lover of stories and a member of Rotaract.
He is a freelance writer ( engage me at www.writegarage.com), skilled in crafting engaging content; from fintech to marketing techniques, startup culture, business development, analysis...the list goes on ..the only thing that keeps him up is the fact that anyone can change the world.