Energy: Manufacturers angry as State stops discount

In January 2019 the government allowed manufacturers to deduct 30% of their electricity cost from their taxable profit. Manufacturers had welcomed the incentive as a reflection of the government’s commitment to the industry by lowering their production costs. But the government has stopped the incentive. In addition, manufacturers oppose the government’s plan to charge VAT on bread.

The government scrapped the 30% electricity rebate programme through the Tax Laws Amendment Act of 2020.

Ms Phyllis Wakiaga, chief executive officer, Kenya Association of Manufacturers, said the electricity discount helped manufacturers cut costs and attract foreign investment.

“We call for the reinstatement of the Energy Rebate Programme, to bring down the cost of energy, and overall, operating expenses,” she told Water Tower.

Two professional services firms Deloitte, and Ernest and Young see this as the wrong time to remove the electricity rebate.

Ernest and Young said this was an incentive to manufacturing companies which had to contend with high cost of power over the years.

“It’s unfortunate that this has been repealed when the government is seeking to improve the contribution of the manufacturing sector to the overall gross domestic product (GDP),” it said.

Deloitte said the energy rebate could have increased competitiveness of local manufacturers. The government is seeking to increase contribution of the manufacturing sector to GDP to 15% by 2022, the firm said.

The audit firm said the government could have tested the impact of the incentive.

“It is therefore surprising that the government has repealed it barely a year after its introduction,”’ Deloitte said. “However, as already mentioned, this measure is in line with the move to reduce tax incentives in order to shore up government revenue.”

Unpredictable tax policies

Ms Wakiaga said Kenya’s unpredictable tax regime obstructs the manufacturing sector’s competitiveness.

“Unfortunately, the cost associated with high taxes is passed on to the final product, thereby hindering our competitiveness,” she said.

The CEO said the government must create a conducive business environment for the sector to recover from disruptions caused by Covid-19 pandemic. Tax reforms could build value chains and drive economic growth, she said.

Ms Wakiaga said persistent uncertainty among investors has led to postponement of investment activities. In addition, high amount of taxes continues to worsen the ease of doing business in the country, she said.

“A key feature of tax policies in Kenya is that they are highly unpredictable,” Ms Wakiaga said. “This leads to business uncertainty, which is detrimental to a conducive business environment.”

What taxes worrying manufacturers?

The manufacturers point their fingers at taxation as an example of the government’s unpredictable policies. The taxes are in the Tax Laws Amendment Act of 2020, Finance Act of 2020 and some proposals in Finance Bill of 2021.

1. Currently, the Tax Laws Amendment Act of 2020, allow investment allowance deductions for industrial buildings at a rate of 50% in the first year and 25 % onwards. This is a reduction from the previous provision of 100%. Ms Wakiaga said manufacturers invested and started capital projects because of the previous 100% investment allowance. She said the change could stop investment projects and have a negative impact on cash flow due to the sudden policy change.

2. Tax Laws Amendment Act of 2020 introduced Value Added Tax (VAT) on vaccines for human and veterinary medicine and medicaments. This change means that manufacturers cannot claim any related input tax they incur while making the products. Such costs are part of the cost of production. Ms Wakiaga said initially the government supported local manufacturers by allowing them to deduct any related input tax incurred while making such products.

3. Minimum Tax. Ms Wakiaga said when the government implements the tax it could devastate businesses. She asked the government to remove the tax.

4. The government started charging plant and machinery 16% VAT in 2020. The government previosuly exempted plant and machinery from VAT. Ms Wakiaga said the cost for such plant and machinery for manufacturers needs to be at its lowest level. This would attract more investors into industry and allow existing manufacturers to continue investing in new and high capacity equipment. “This continues to deter new investments and SMEs [small and mediums enterprises] seeking to diversify production through investing in plant and machinery,” she said.

Finance Bill of 2021

Ms Wakiaga gave proposals of the Finance Bill of 2021, which she said will negatively affect manufacturers and the economy.

1. Finance Bill of 2021 proposes to amend VAT Act to remove bread from the zero-rated category. The change is expected to take effect on 1 July 2021. Professional services firm KPMG said the change will increase price of bread–a staple food for Kenyans. The firm said the proposal could be fought because of consumers’ reduced incomes because of Covid-19.
2. Finance Bill of 2021 proposes to tax locally manufactured sugar confectionary and chocolate. Ms Wakiaga said this will result in a decline in the market share and revenue of local manufacturers. “Hence an overall decline in tax revenue for the government,” she said.
3. Finance Bill of 2021 seeks to amend Income Tax Act to include income from online businesses as taxable income.
4. Finance Bill of 2021 also proposes to amend the VAT Act to remove the role of the National Assembly in reviewing and approving the regulations made under the Act.
5. In addition, Finance Bill of 2021 proposes to amend the VAT Act to charge VAT on syringes.
6. Finance Bill of 2021 seeks to amend the Excise Duty Act to introduce a betting tax of 20%.