This archive report was first published on 24 June 2020.
Kenya's manufacturing sector is facing a new challenge in the form of tax reforms introduced in 2020. The Tax Laws (Amendment) Act, which came into effect on April 25, has the potential to undermine the country's efforts to boost local industries.
While the Act reduced the Value Added Tax (VAT) rate from 16 per cent to 14 per cent, it also removed the exemption on VAT for plant and machinery, effectively increasing the cost of manufacturing equipment. This move is likely to discourage investors from expanding local manufacturing capacity due to the higher capital outlay required to build and expand factories.
The change also repealed the Second Schedule to the Income Tax Act and inserted a new one that has either reduced or eliminated tax incentives such as investment allowances and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, including manufacturing.
Experts agree that tax incentives should be limited to protect public revenue, but 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, which will certainly hamper manufacturing in counties.
Furthermore, the reduction in investment allowance will affect machinery used for manufacturing, including those used directly in manufacture and ancillary purposes such as waste management and disposal. This will increase the cost of compliance with environmental laws, a major barrier to investment.
Construction of plastics recycling plants will also be affected, as recycling not only protects the environment but also reduces pressure on natural resources. The amendment has potentially negative environmental outcomes and raises serious issues from a sustainability perspective.
As the government seeks to boost local industries, it 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 Covid-19 pandemic.
