Implications of Finance Bill, 2024 on Manufacturing
Wednesday, 28th May 2024, Nairobi. Yesterday, the Kenya Association of Manufacturers (KAM) presented its feedback on the Finance Bill, 2024 to the National Assembly Committee on Finance and National Planning.
The Bill, published on 9 May 2024, seeks to amend laws relating to various taxes and duties including Income Tax Act, the Value Added Tax Act, the Excise Duty Act, the Tax Procedures Act, the Miscellaneous Fees and Levies Act, and the Affordable Housing Act, among others.
The manufacturing sector has an ambitious plan to drive the sector’s contribution to Gross Domestic Product (GDP) to 20% by 2030. Realizing this plan calls for bold, pragmatic decisions to develop and implement transformative industrial policies that will favour the local manufacturing sector and attract investors.
An analysis of Kenya’s manufacturing sector shows that it has been shrinking, from contributing 10.9% to GDP in 2013 to 7.6% in 2023. One of the major reasons for this is the uncertainty and unpredictability of tax policies effected yearly through finance acts.
“In principle, Kenya operates within EAC Common Market, COMESA and now AfCFTA. Any fees, levies, and duties that are imposed by the Government of Kenya affect Kenyan products and companies not only as domestic taxes but also as drivers of cost un-competitiveness in the Kenyan market as well as international markets like EAC and COMESA,” noted KAM Chief Executive, Mr Anthony Mwangi.
During the public consultations on Finance Bill 2023, KAM stressed that some provisions would have dire consequences on the manufacturing sector. This includes hurting the competitiveness of local industries leading to a reduction in exports, job losses, loss of tax revenue, and increased prices impacting Mwananchi. For instance, a paper bag and sack manufacturer that had secured a market for bleached and unbleached sack kraft paper for the largest supermarket chains in Europe lost the contract in September 2023 due to non-competitive prices.
The Finance Bill 2024 presents some progressive proposals aimed at promoting manufacturing growth, however, there are several others that shall hinder this objective, and ultimately impact Mwananchi.
The first is the Eco Levy. This is a new environmental tax targeting manufacturers and importers of select products with the aim of setting up waste management infrastructure, financing Kenya’s sustainable waste management programme, and setting up material recovery facilities and electronics waste collection centres across 47 counties. Notwithstanding KAM’s support on environmental conservation, the Eco Levy will not only duplicate the existing levy mandated under Extended Producer Responsibility (EPRs) schemes, but it will also further reverse Kenya’s initiatives to create a circular economy to manage its waste and become a regional recycling hub through the proposed removal of the incentive to increase investments in recycling of waste products.
Additionally, the Eco Levy will be detrimental to Mwananchi, as it will increase prices for all plastic packaging materials, batteries, and hygiene products. For instance, the Ksh. 150 levy per kilogram of plastic packaging will increase the cost of a 400 grams loaf of bread by Ksh. 9 from Ksh. 65 to Ksh. 74; increase 1 litre of cooking oil by Ksh. 16.81 from Ksh. 300 to Ksh. 316.81; increase 1 kilogram of power detergent by Ksh 30 from Ksh. 200 to Ksh. 230 notwithstanding other duties proposed by the Finance Bill 2024 on the same products.
The second is Excise Duty. The government has proposed to remove the provision allowing manufacturers to offset the costs of their raw materials subject to excise. The offset mechanism is meant to encourage local value addition and drive cost competitiveness. Additionally, the government has proposed to impose excise duty on various products including coal, plastic products and cooking oil, which will increase the cost burden to Mwananchi who is already reeling from the effects of increased cost of living and reduced disposable income.
Case in point, the government has proposed a 25% excise duty on crude palm oil, 25% excise duty on finished cooking oil, 10% excise duty on plastic packaging materials, and eco levy on plastics packaging at Ksh. 150 per kilogram. This will see the cost of 1 litre cooking oil increase by Ksh.168 from Ksh. 300 to Ksh. 468.
“A stable and predictable tax policy environment is critical for driving investments. We appeal to the government to implement the National Tax Policy, which aims to assure both local and foreign investors have certainty and consistency in tax policies, including a framework for granting tax incentives and a favourable regulatory tax regime,” added Mr Mwangi.
Specific to the Finance Bill, 2024, KAM proposes:
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The introduction of a lower VAT rate for manufactured goods instead of VAT exemption to reduce the cost of finished goods.
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Plant and Machinery under Chapter 84 and 85 should be VAT exempt to reduce investment costs.
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There should be no taxes/levies on industrial inputs.
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All taxes/levies charged on good manufactured for exports should be claimable/refundable/offset/exempt.
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Introduction of an offsetting mechanism (for instance, remission) on duties and levies imposed on industrial inputs, such as excise duty and Export and Investment Promotion Levy, to ensure Kenya’s competitiveness.
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The 9th, 20th and 30th (where applicable) of every month as dates to remit various taxes and statutory deductions
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Any levies, fees and charges proposed through the Finance Bill and supported by an impact assessment study.
“If implemented as is, the Finance Bill 2024 will increase the cost of production, thereby destroy industry’s competitiveness, and subsequently, dent our local and export markets, increase retail prices, burden Mwananchi, and increase cashflow requirement at a time when the environment is characterized by rising interest rates. Ultimately, this will render local industries uncompetitive which will push them to either downsize, move to more competitive countries or close down, as a last resort,” concluded Mr Mwangi.
Our focus as a country must be on supporting the manufacturing industry to create jobs and wealth, boost productivity, lower the cost of living and ultimately, create prosperity for Kenya.
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