Taxes, illicit trade hurting Kenya’s manufacturing sector - report

An inconsistent tax regime, high cost of doing business and illicit and counterfeit trade are major barriers in Kenya’s manufacturing sector, a new report shows.

This is coupled with limited availability and access to quality data thus affecting investment decisions by local and foreign firms.

The American Chamber of Commerce, Kenya (AmCham Kenya) Annual Report 2022, released on Thursday, identifies gaps in the agriculture sector, which is a major source of raw material in the value-addition and processing components of manufacturing.

The sector has also been impacted by climate change and sustainability challenges, public finance and capacity shortfalls, underdeveloped value chain system and lack of an efficient cooperative system.

While taxation has been a major concern for manufacturers in Kenya, high cost of electricity and fuel prices have all also contributed to the high cost of production in the country, eating into manufacturers’ margins, while affecting new investments.

According to AmCham Kenya CEO Maxwell Okello, this applies to both local and foreign companies.

“The business environment in the country has to be good so that we can promote more investments, create jobs and economic development,” Okello notes.

Local players have also continued to lose their market share to illicit and counterfeit goods.

According to the Kenya Anti-Counterfeit Authority (ACA), 78 per cent of consumers in the country buy counterfeit goods because they are cheaper compared to original brands.

With the high cost of living and rising prices of goods, mainly occasioned by the disruption in the global supply chain affected by the Russia-Ukraine war, and the cost of doing business which has led to price hikes on both imports and locally manufacturers goods, ACA has warned of a rise in illicit trade with counterfeits leading.

Counterfeit refers to illicit trade that infringes Intellectual Property Rights such as trademarks, patents, designs and utility models.

Local players most affected include those producing food and beverages (mainly alcohol), cosmetics, tobacco products among others.

Illicit trade in the country is estimated at about Sh820 billion, which is almost 39 per cent of KRA’s Sh2.14 trillion ordinary revenue target for the current financial year.

A study by ACA, indicates the government loses in excess of Sh153.1 billion in potential revenue to illicit trade annually.

“The reality of this threat is further amplified by the fact that illicit trade in goods manufactured by sixteen sectors, that contribute 90 per cent of total manufacturing sector’s GDP accounted for 71 per cent of the total illicit trade,” ACA notes in the report.

Manufacturing sector growth slowed down to 2.7 per cent in 2022 compared to 7.3 per cent in 2021, the Economic Survey 2023 by the Kenya National Bureau of Statistics (KNBS) indicates, amid high production costs and increased competition from cheap imports.

According to the lobby organisation, which is keen on growing trade and investments between Kenya and the US, policy advocacy for enhanced business and investment climate remains a key driver in realising growth in the country.

President William Ruto’s government has in recent weeks announced a number of measures to improve the investment climate, with the Finance Bill 2023 proposing a number of tax measures.

Among them is tax refunds which the President said verified claims should be payable within six months, failure to which investors can offset against future tax liability.

The Finance Bill has proposed to revise the Import Declaration Fee from 3.5 to 2.5 per cent, a move expected to support local manufacturing by reducing the cost of inputs imported.

It has also proposed a lower Railway Development Levy from 3.5 per cent to 2.5 per cent to cushion local manufacturers from costly imports, in the wake of a weak shilling against the US dollar.