•Yatani is today expected to outline a Sh3.3 trillion government revenue generation and spending plan (budget) for the 2022/23 financial year.
•It comes on a tough microeconomic environment linked with high taxation, skyrocketing food prices, cost of living and production costs.
Manufacturers are hoping for a reduction in the multiple taxes to ease the cost of doing business in Kenya in President Uhuru Kenyatta's exit budget.
National Treasury Cabinet Secretary Ukur Yatani will outline a Sh3.3 trillion government revenue generation and spending plan (budget) for the 2022/23 financial year.
It comes amid a tough economic environment characterised by high taxation, skyrocketing food prices, spiralling cost of living and high production costs.
According to the Kenya Association of Manufacturers (KAM), this year’s budget should centre on the common man's needs by reducing taxes for basic commodities.
Additionally, it should focus on reducing the cost of production for manufacturers, which will ultimately reduce the cost of goods for citizens, KAM says.
“Already, citizens must contend with the ever-increasing cost of essential commodities due to high taxes and levies and fees, and global supply disruptions, among others, against dwindling purchasing power,” KAM chief executive Phyllis Wakiaga told the Star yesterday.
The budget should also incentivise investors to venture into manufacturing whilst promoting the growth of SMEs and large manufacturers.
Manufacturers are hoping for the lowering of the cost of industrial inputs by reducing the rate of Import Declaration Fee (IDF) and Railway Development Levy to 1.5 per cent, respectively, for industrial machinery and spare parts.
The IDF is payable on all imports into the country at 3.5 per cent of the customs value of the goods.
However, there is a reduced rate of 1.5 per cent on raw materials, intermediate goods, and inputs for the construction of houses under the affordable housing scheme approved by the government.
According to manufacturers and importers, IDF and RDL increase the cost of imported spare parts and industrial machinery and other capital inputs, thus increasing the cost of investments and manufacturing in the country.
“When spare parts and industrial machinery are imported into the EAC, IDF is waived for all manufacturers in the region expect Kenya. This puts manufacturers in Kenya at a cost disadvantage,” Wakiaga said.
Manufacturers should also be allowed to offset “inputs” as part of the relief that is provided to manufacturers under Section 14 of the Excise Duty Act 2015, KAM says.
The Excise Duty Act, 2015, Section 14 provides for relief for raw materials, where excise duty has been paid in respect of excisable goods imported into or manufactured in Kenya by a licensed manufacturer, and which have been used as raw materials in the manufacture of other excisable goods.
It provides that the excise duty paid on the raw materials shall be offset against the excise duty payable on the finished goods.
By introduction of inputs, manufacturers will be able to recover their costs including packaging material and remain competitive, KAM says.
To ensure certainty and predictability of tax policies to encourage industrial investments, KAM has proposed VAT exemption on plant and machinery used for manufacture of goods.
The Tax Law Amendment Act 2020 deleted, from the VAT exempt Schedule, plants and machinery thereby subjecting them to 16 per cent VAT.
“Plant and machinery are a critical asset to the business operations around which the whole business revolves to ensure productivity. Globally, business plant and machinery costs are incentivised to encourage investments and subsidise costs for manufacturers,” Wakiaga said.
KAM also expects a reverse to the previous provisions of 100 per cent for investment deduction allowance for industrial buildings and machinery in Nairobi, Mombasa, and Kisumu, and 150 per cent outside of Nairobi, Mombasa, and Kisumu.
The Tax Law Amendment Act 2020 overhauled the Second Schedule to the Income Tax Act.
The changes reduced the investment allowance deductions for industrial buildings and machinery from 100 per cent to 50 per cent in the first year, and 25 per cent on a reducing balance for the balance.
Industries also expect the limitation of interest deduction to 30 per cent of Earnings Before Interest Tax, Depreciation and Amortisation (EBITDA) to be amended.
EBITDA is essentially net income (or earnings) with interest, taxes, depreciation, and amortisation added back,a metric used to evaluate a company's operating performance.
KAM is keen to have limit interest deductibility to be the greater of 30 per cent of EBITDA,
12 per cent of assets or Sh400 million, with a allowance of carrying forward excess interest for up to five years.
It also wants deducibility limits to be on net interest, not gross interest.
“Apply the deductibility limits only to entities with foreign borrowings,” KAM says.
The Finance Act 2021 limited interest to be deducted to a maximum of 30 per cent of EBITDA.
This measure introduced a restriction on the amount of interest and other financing amounts that a company may deduct in computing its profits for corporation tax purposes.
“The provision is punitive towards capital-intensive industries such as manufacturing. Additionally, it increases the cost of financing manufacturing investment in Kenya, most of which is in the form of debt,” Wakiaga said.
It also increases the income tax payable by manufacturers who are struggling with profitability.
“We are hopeful that the government will take up these proposals as they are geared towards bolstering the growth of the sector,” she said.