[Column] Phyllis Wakiaga: Kenya’s tax policies must be built to nurture and expand businesses
Taxation is a key element in cost of doing business and hence should be designed to optimize growth of industry and increase overall competitiveness.
Ideally, favourable tax policies should be useful in predicting aspects of business for instance, output fluctuations throughout the business year. Consequently investors can plan their expansions and long-term investments, thereby increasing revenue to the country.
Unfavorable tax policies however, not only discourage investment and growth, they are also a disincentive to exporters, which in the long run dilutes our competitiveness.
Kenya’s Declining Exports
A quick snapshot in the region reveals that intra- regional exports increased from USD 2.7 billion in 2016 to USD 2.9 billion in 2017. The increase was partly driven by increased exports by Tanzania and Uganda to other Partner States which grew by 18.4 percent and 37.3 percent respectively.
Rwanda recorded intra-regional export growth of 6.4 percent while Kenya, South Sudan and Burundi recorded decline by 7.4 percent, 24.2 percent and 6.0 percent respectively.
Decline of Kenya’s exports in the region was driven by reduced exports of manufactured products such as cement, iron and steel, salt and medicaments due to a continued erosion in our competitiveness. The two biggest contributors to this are systemic inefficiencies and unfavourable tax policies.
Delays in VAT Refunds
Businesses in the manufacturing sector have experienced major delays in VAT refunds, in some cases going back 3 years. Recent system changes at the Tax Authority, which are aimed at easing administrative process, are unintentionally causing delays in verification of VAT claims that date back to 2014 despite exporters presenting proof of entry from across the borders.
Other countries have devised ways of tackling this problem, a crucial one being the charging of interests on delayed refunds. The impact of delayed refunds is dire for business. It means financing normal operations becomes very costly and this is more so for exports. Some manufacturers are currently borrowing expensive loans to maintain cash flow levels; liquidity becomes a major challenge and business operates at low capacity.
When faced with these hurdles, many manufacturers are faced with hard questions. How can the business stay productive and profitable? How can we recoup the heavy investments made in the last few years, to expand capacity and increase export business?
Competitiveness Must Be Addressed
At present, Kenya is at a cost disadvantage of nearly 12% on most manufactured goods, compared to other countries in the region. It is absolutely vital that this cost imbalance be addressed as a matter of priority.
For example, charges of 2% for Import Declaration Fee on all imported industrial inputs, and 1.5% for the Railway Development Levy, adds 3.5% on all products even before any other logistics, administrative and production costs are loaded. Our partner states in the region do not have these additional costs. When other costs such as delayed payments and cost of financing the business are factored, we automatically become more expensive by nearly 12%, making us unable to compete on the same level as neighbouring countries.
Industry, through Kenya Association of Manufacturers, continues to engage Treasury and KRA on these matters hoping for a quick resolve. The government has manufacturing as one of the Big 4 Agenda pillars, and rightly so, because manufacturing is the only one of the pillars capable of providing productive and sustainable jobs. However, tax policies, infrastructure and regulations have to be built to uphold this vision for us to realize the economic outcomes of the Agenda.