Review tax measures hampering recovery of the industrial sector

Manufacturing, like other sectors of the economy, is reeling from the effects of the Covid-19 pandemic. The tax relief measures introduced to cushion Kenyans from the economic fallout of the coronavirus were, therefore, timely and welcome.

However, the Tax Laws (Amendment) Act 2020, which came into effect on April 25, could water down the positive gains. The Act amended various tax statutes, but also introduced changes that may eventually hurt households and businesses, especially manufacturing.

The changes to the Value Added Tax (VAT) Act and the Income Tax Act, for instance, have the overall effect of increasing the cost of manufacturing, and ultimately undermining the initiatives seeking to boost local industries like “Buy Kenya, Build Kenya” and the ‘Big Four Agenda’.

The change reduced the VAT rate from 16 per cent to 14 per cent, effectively lowering the prices of consumer goods and services. But it also removed the exemption on VAT for plant and machinery from exempt to standard rated (14 per cent), which will have negative effects.

First, it will increase the cost of manufacturing equipment, discouraging investors from expanding local manufacturing capacity due to the higher capital outlay required to build and expand factories. Secondly, it’s likely to disrupt planned expansion of factories and production lines due to increased capital expenditure. Thirdly, higher taxes have the general effect of increasing the cost of goods and services as well as the overall cost of living.

The change also repealed the Second Schedule to the Income Tax Act and inserted a new one that has either reduced or eliminated tax incentives such as investment allowances and exemptions. This affects capital allowances on buildings, machinery and equipment across an array of economic activities. The reduction from 100 per cent to 50 per cent will hurt capital-intensive businesses like manufacturing.

Economic experts agree that tax incentives should be limited to protect public revenue. But investment deduction is one of the most valuable tax incentives to investors. Reducing or eliminating them will discourage investment in manufacturing, reduce economic output and destroy jobs.

The change also abolishes investment deduction of 150 per cent that was meant to encourage investment outside the main cities. This will certainly hamper manufacturing in counties, which have been actively wooing investors. Perhaps, this is an issue the Council of Governors ought to take up with the National Treasury so as to promote and protect investments in counties.

Still on capital incentives, the reduction in investment allowance will affect machinery used for manufacturing. That includes those used directly in manufacture and ancillary purposes such as waste management and disposal, minimising environmental damage and improving water supply and drainage.

It will now be more expensive to invest in environmental protection, yet the law requires manufacturers to minimise the impact of their operations on the environment. Increasing the cost of compliance with environmental laws escalates the cost of doing business, a major barrier to investment.

Construction of plastics recycling plants will also be affected. Recycling not only protects the environment, but also reduces pressure on natural resources as firms don’t have to source new raw materials.

The amendment also has potentially negative environmental outcomes and raises serious issues from a sustainability perspective.

The manufacturing sector has a vital role in the attainment of the international Sustainable Development Goal 12, on protecting the planet through sustainable consumption and production.

The government should reconsider the tax measures highlighted above since their net effect is to further dim the prospects of the recovery of the industrial sector at a time when the industries are shutting down due to the vagaries of Covid-19.

Mr Malde is the commercial director, Pwani Oil.