Kenya Association of Manufacturers (KAM) appreciates the government’s continued support towards driving manufacturing sector growth.

The National Assembly published the Finance Bill 2023 on 28th April 2023. The Bill seeks to amend laws relating to various taxes and duties such as the Income Tax Act, Value Added Act (VAT), Tax Procedures Act and Excise Duty Act while proposing new taxes, regulations, and incentives.

KAM has engaged its members on the Bill. Whereas some of the proposals in the Bill are aimed at promoting manufacturing growth in some sectors, we are concerned that several others shall hinder this objective. KAM engaged the National Assembly’s Departmental Committee on Finance and National Planning on 24th May 2023 and shared its feedback as follows:

The Association applauds the proposals that seek to enhance manufacturing sector growth including among others, the proposal to remove locally acquired loans from 30% interest restriction under EBIDTA and removal of section 10 of the Excise Duty Act that gave Kenya Revenue Authority (KRA) powers to adjust the specific rate of excise duty once a year to consider inflation.

In addition, the Bill proposes to remove the locally manufactured plastics from the list of goods subjected to excise duty, previously imposed on articles of plastic of tariff heading 3923.30.00 and 3923.90.90. The move will reduce the cost of plastic products which will in turn reduce the cost of consumer goods packed in plastics such as edible oils, water, juices, sodas, soaps, detergents, and cosmetics products, among others. However, the Bill has some proposals which in our view have far-reaching unintended consequences to the economy if implemented.

To begin with, KAM is concerned with the whole philosophy of imposing levies on imported raw materials and intermediate products ostensibly to promote exports. KAM sees no economic relationship between imposing of levies on importation of clinker, metal products and packaging paper products with exports. In our view, imposing levies on imports makes Kenya uncompetitive compared to other EAC partner states. This import levy on raw materials goes against established taxation regimes such as EAC Common External Tariff (CET) and export-led Duty Remission Scheme (DRS).

For instance, the imposition of a 10% levy on imported clinker which constitutes 60-70% of inputs meant for cement production goes against the National Independent Clinker Verification Committee report published on September 2021. The committee comprised of Ministries in charge of National Treasury, Trade and Industry, Petroleum and Mining, Kenya Bureau of Standards (KEBs), cement industry players and KAM. It was established that Kenya should not impose higher duties on clinker until 2026.

The implementation of this levy, therefore, poses serious negative economic and social ramifications. In a meeting held on 26th January 2023 between MITI (Ministry of Investment, Trade & Industry), KAM and cement manufacturers, the companies committed to an accumulative investment of circa Kes. 100 billion in clinker manufacturing within the period mentioned above if the current taxation regime that affords them quality imported clicker is maintained “as is” as per the committee’s recommendation. However, the proposed import levy will do less to protect the local clicker producers and instead, it will lead to importation of cheaper finished cement from EAC partner states which may lead to the loss of over 100,000 jobs. This philosophy will replicate in the other proposed sectors including billets, wire rods and, kraft (paper products).

KAM is concerned with the proposal to impose a 10% export levy on imported kraft. Kraft liner is used in packaging of staple foods such as maize, wheat, cassava, millet flour among others. The proposed levy will have a direct negative impact of increasing the cost of packaging Unga. This will increase the cost of unga for consumers and comes at a time when mwananchi is unable to put up with the inflated cost.

Our analysis shows that by imposition of the levy, Kenyan products will be the most expensive in the East African region, which will reverse the trade flow from EAC partners to Kenya. Locally, the increase in commodity prices will be passed on to the consumers who are already grappling with the ever-increasing cost of living.

Secondly, on the Leather Sector, the Bill proposes to reduce the rate of the levy from 80% to 50% on raw hides. KAM is concerned that the proposal will lead to a shortage of raw hide and skins. Kenya has 13 tanneries that are currently operating at about 30% capacity due to the lack of adequate raw hides and skins. Kenya produces approximately 5,000 metric tonnes of raw hides and skins monthly. However, tanneries are only able to access 30% of this, whilst the rest is smuggled out of the country. The reduction of the export levy to 50% will lead to the collapse of the sector, jobs losses as well as loss of government revenue.

Thirdly, the Bill proposes to review the 1.5% Import Declaration Fees (IDF) on imported raw materials and intermediate products and increase it to 2.5% for all manufacturers. The review will raise the cost of importation and subsequently the price of manufacturing essential goods. The increased costs will be passed on to consumers who are already struggling with high cost of living.

The bill further proposes a mandatory deposit of 20% of disputed tax with the KRA when appealing a Tax Appeals Tribunal (TAT) decision. This will negatively impact working capital and cash flow of most businesses since the money will be held in escrow without the capacity to earn any interest, given that tax disputes can take years to resolve. Additionally, it shall discriminate and deny aggrieved taxpayers access to justice if they cannot raise the amount in dispute. This will lead to an unfair administration of justice because it is only the taxpayer who is required to make the deposit. KRA is exempt from the same rule where the Commissioner appeals a TAT ruling and particularly in respect of tax refund disputes.

The proposal to impose excise duty (Kes. 42.1 per kg) on locally manufactured confectionery will drive several local companies out of business as it will make them uncompetitive and their products unaffordable. This move will eliminate the competitiveness of the local confectionary industry against imports as the retail prices will increase due to the excise duty cost that will be passed on to the consumers. It will also erode the competitiveness of locally produced confectionery products in regional export markets such as Tanzania and Uganda, where similar proposals to make local confectionary excisable were rejected after lawmakers assessed the negative impact on industry.

Furthermore, the proposal to charge excise tax (Kes. 5 per kg) on sugar will lead to an increase in the price of sugar and goes against the government’s agenda of bringing down the cost of living. Suffice to note, the current price of sugar has hit a high of over Ksh 200 per kg. Additionally, imposing excise duty on sugar will make the products manufactured using sugar uncompetitive because other EAC states do not impose excise duty on sugar.

In addition to the above, the Bill has also proposed a 20% excise duty on locally manufactured pasta. This will increase the cost of locally manufactured pasta and goes against our goal of transforming Kenya into an industrial-led economy. Historically, Kenya imported all its pasta. However, the government encouraged investment and local production through the incentive of subjecting only imported pasta to excise, which resulted in the setting up of a local manufacturing plant with the aim of making Kenya self-reliant. We stand to erode these gains.

Finally, the Bill proposes to move inputs and raw materials (either produced locally or imported) supplied to pharmaceutical manufacturers from the zero-rated schedule to the exempt schedule. Effectively, local suppliers of the materials shall not be able to claim input VAT. Thus, they will have to factor this amount in the selling price, consequently increasing the price of the locally procured inputs and raw materials. It is important to note that the materials were moved from the exempt schedule to the zero Schedule through the Finance Act 2015.

We are living in challenging times when the cost of living is at an all-time high. Our focus as a country must be on reducing the cost of commodities and sustaining our economy. We urge the government and national assembly to consider the views from all stakeholders, including citizens and the business community, before adopting the proposals in the Finance Bill, 2023.