Statement on Proposed Budget 2019/2020

KAM would like to applaud the Government’s move to prioritize the competitiveness of the manufacturing sector in the just read proposed budget for the next financial year. The sector has been operating at a 13% cost disadvantage compared to our neighbouring countries. Proposals made in the budget are likely to address this challenge if effectively implemented.

Some of the measures stated that will positively impact the sector are as follows:

• 30% Corporate Tax Power Rebate Programme:The framework was passed through Finance Act 2018 after which the Ministry of Energy, Ministry of Industry, Trade and Cooperatives and KAM engaged extensively with the aim of implementing it from January 2019. A rebate of 20% for the manufacturers in the first year subject to them having a Tax Compliance Certificate will be allowed and the remaining 10% of the rebate will be earned subject to the rebates criteria, upon achievement of the key performance indicators. This is based on the proposed Actual Overall Performance. We request the government to gazette and roll out this program immediately.
• Export Refund Formula:The formula has long restricted VAT refund amounts by calculating refund using net position for the month and allowing a percentage of export sales to total sales as the refund amount. The formula has been punitive to manufacturers and more so to exporters who are already in a continuous credit position. Therefore, the proposed measure to revert to the previously applied formula will grow our exports as a country by enabling the flow of the required working capital. Consequently, this will improve liquidity in the market.
• VAT Withholding Tax from 6% to 2%:At present whenever a manufacturer pays 16% upon the importation of raw materials, the effective rate becomes 22% when they supply and 6% is withheld by creditors. This lowers their creditworthiness with financiers. The proposed review to reduce VAT Withholding Tax to 2%, will improve liquidity for many manufacturers and open up cash flow precipitating high productivity in their supply and value chains.
• VAT Refunds:The large accumulation of VAT refunds with KRA arising from VAT on zero-rated supplies has had a negative impact equally on liquidity and cash flow for manufacturers across the country. We appreciate the constitution of a team at the National Treasury to quickly validate the outstanding refunds with a view to clear them within the next two months.
• Prompt Payment:On Prompt Payment, the proposal to amend the Competition Authority of Kenya Act to regulate buyer power and ensure fair business practices is going to have a widespread positive impact on manufacturers and especially SMEs in industry. Notably, the proposed measure to have all suppliers to be paid within 60 days is good news for many businesses whose ‘health’ is dependent on the uptake of their goods by Government entities. In the same breath, it is critical that County Governments follow suit and commit to implementing prompt payment measures to encourage investments in their counties, spurring growth and distribution of wealth.
• Illicit Trade and Counterfeit:It is encouraging to see Government’s continued commitment to fight illicit trade and counterfeits through the proposed measures to continue to vet imports, but at the same time, ensuring streamlined processes to reduce delays in cargo clearance.
• Local Content:The proposal for all Ministries, Departments, Agencies and other public entities to give exclusive preference in procurement of motor vehicles and motorcycles to local companies will go a long way in boosting the growth and productivity of local auxiliary industries and enterprises, as well as create job opportunities. KAM has already submitted a list of locally manufactured goods for consideration by the Government.
• Transport & Logistics:The move to carry all the inspections at the Port of Export and only intervene in some containers at the destination port through actionable intelligence is commendable. This will streamline the process of the Pre-Verification of Conformity to curb losses brought about by demurrage and storage costs at the port. This has been a challenge for many manufacturers, especially in the past year.
• Plastic Waste Management:Industry has been leading several initiatives on this front to support Vision 2030’s objective of a clean and sustainable environment for Kenya. Treasury has made two progressive proposals to incentivize recycling and grow the circular economy in Kenya. These are (1) proposal to exempt from VAT all services offered to Plastic recycling plants and supply of machinery and equipment used in the construction of these plants and (2) the proposal to lower corporation tax for the first five years to 15% for any investors operating a plastic recycling plant. Not only will this move encourage more investments in this field and therefore the creation of more jobs, but will also provide a holistic solution to the complex problem of waste management.
• SME Support:The proposed measure to offer unsecured loans to SMEs through the Stawi Loan application is a huge step in improving their access to credit and finances, which will help them stabilize their businesses. Similarly, the proposal to introduce an amnesty on the tax penalties and interests on any outstanding tax to enable SMEs to enlist in the GEMS segment of the NSE will boost SME businesses and help them raise finances from the capital markets.

As industry, we look forward to the implementation of these proposals as they play a significant role in the goal to increase the manufacturing sector’s GDP contribution from the current 7.7% to the desired 15%. There is no doubt that if the measures herein are sustained and implemented effectively a double-digit annual growth for industry is achievable.

Sachen Gudka

Chairman, Kenya Association of Manufacturers