Reconsider proposed VAT on aviation services

Treasury Cabinet Secretary (CS) John Mbadi’s sober approach to discussions on tax matters is refreshing. He has chosen to publicly rationalise the need for tax adjustments hitherto considered contentious. This is a welcome departure from previous officeholders who came across as dumbing down Kenyans with the “my way or the highway” approach on tax policy issues.

No doubt Kenyans of goodwill salute the CS’s proposals to curb corruption in the civil service. This, he says, is “through fiscal discipline, e-procurement and zero-based budgeting.”  But even as policy wonks at Treasury moot tax proposals to meet the national budget deficit, they may want to balance such considerations against their deleterious effects on some industries.

Take, for instance, the Proposed Tax Laws Amendment Bill 2024 published a week ago. One clause says, “16 per cent Value Added Tax (VAT) will now apply on aircraft parts and services such as air ticketing, aircraft hiring, leasing and chartering.” These services were previously tax-exempt. According to industry pundits, VAT is seldom levied on air travel services in other jurisdictions. Doing so apropos of Kenya would make the country lose its regional aviation exceptionalism.

The immediate impact would be felt on passenger tickets that would potentially be priced above those of competitors from other countries. Further, because most local carriers have little output VAT, this proposal would exacerbate the already huge backlog of VAT refunds pending from the Kenya Revenue Authority. More insidiously would be the loss of maintenance, repairs and overhaul services, popularly known as MROs, to other jurisdictions.

The national carrier Kenya Airways (KQ) carries out its MRO in Nairobi. It also does the same for other airlines from Kenya and beyond. In the region, the KQ MRO team offers services to Uganda Airlines, Air Tanzania, Precision Air, and Rwandair. Further afield, it services Air Peace of Nigeria, Mauritania Airlines, Air Botswana, Air Burkina, Egypt Air, amongst others. In fact, there is significant demand for such third-party work. Tax incentives are needed so that KQ’s MRO business is enhanced to include more airline customers.

From the foregoing, policy wonks would be well advised to stop viewing air travel as a luxury. It is not. The sapient view would be to consider the impact of the entire aviation industry on the country’s GDP and to formulate tax policies accordingly. Data from the Kenya National Bureau of Statistics reveals that the “industry in Kenya contributed 4.6 per cent of the total annual GDP in 2022.” Granted that this was the post-Covid recovery period, the contribution is most probably significantly higher now that global air travel is back to pre-pandemic levels.

Africa is home to 17 per cent of the world’s population yet commands a paltry 3 per cent of the global air travel market. There is a lot of potential to develop this market to connect African countries for trade purposes especially where they are under-served by a poor road network. Countries that are cognisant of this fact are going all out to offer incentives to their air operators. Ethiopia is already way ahead in positioning itself. Rwanda, Tanzania and Uganda are building aviation hubs that could upend Kenya’s run as the regional heavyweight. Kenya should reconsider the pernicious effects of VAT on aviation services.

Mr Khafafa is a public policy analyst