Finance Bill will hit sector hard, warn aviation industry players

Local aviation and logistics industry players oppose clauses in the Finance Bill that remove tax exemptions for airlines.[File, Standard]

Local aviation and logistics industry players have opposed clauses in the Finance Bill that remove tax exemptions for airlines. They warned that a high tax regime could result in a major setback for the sector by slowing down aircraft fleet modernisation while also hitting exporters of key commodities with higher costs. 

This year’s Finance Bill seeks to reintroduce 16 per cent VAT on aircraft and parts as well as the Import Declaration Fee (IDF) and Railway Development Levy (RDL) on imported aviation technical components, which the Kenya Association of Air Operators (KAAO) said will inflate capital and maintenance expenditures.

 The Shippers Council of Eastern Africa (SCEA) also warned that higher taxes on aviation will hit interconnected sectors such as agriculture, tourism and manufacturing, which will have to pay more in freight charges.

KAAO, in submission to parliament on the Bill, also said previous attempts to aggressively tax the aviation sector resulted in mass deregistrations of aircraft as owners moved to more competitive countries.

“By levying VAT, RDL and IDF on aircraft acquisitions, engines, critical components and spare parts, the State artificially inflates capital and maintenance expenditures,” KAAO told the National Assembly’s Finance and Planning Committee. “These increased overheads are inevitably passed on to the consumer through higher fares, eroding Kenya’s regional competitiveness and deterring timely maintenance or fleet modernisation necessary for safety.”

The airlines’ lobby noted a similar move in 2023, when the government introduced VAT on the hiring and leasing of helicopters, resulting in the deregistration of aircraft from the Kenyan registry due to the added tax burden.

“Consequently, several helicopter operators opted to deregister their aircraft and relocate operations to neighbouring countries with more favourable tax policies,” said KAAO, noting there were 74 deregistrations of aircraft during the year, the highest in years. 

The lobby noted that higher taxes go against Kenya’s National Aviation Policy and projects the country’s tax policy as unstable.

This comes at a time when countries such as Ethiopia and Rwanda are putting in place measures to attract investors, airlines and travellers to their countries.

“Kenya’s primary rivals, Ethiopia and Rwanda, along with continental leaders like South Africa and the Ecowas (Economic Community of West African States) bloc, have moved towards treating aviation as essential economic infrastructure rather than a short-term source of tax revenue,” said KAAO. 

Rwanda and Ethiopia have embarked on major infrastructural upgrades, but also eased restrictions for carriers and travellers by reducing aviation-related taxes and charges. 

Ecowas, on January 1 this year, moved towards the reduction of the high cost of regional air travel through the Ecowas Declaration that abolished certain taxes such as tourism levies, as well as reduced passenger service charges across West Africa. “This ‘competitiveness shock’ is projected to drop ticket prices by up to 40 per cent, forcing the East African Community (EAC) to re-evaluate its cost structures to prevent traffic diversion,” said KAAO.

“For Kenya to remain the preferred gateway for East Africa, it must contend with the aggressive ‘zero-tax’ and ‘zero-rating’ strategies adopted by its neighbours and global peers.

High operational costs driven by taxation directly influence route profitability, causing investors to shift capacity to more ‘tax-friendly’ jurisdictions.”The Shippers Council of Eastern Africa (SCEA) also raised concerns about the Finance Bill’s proposal to increase taxation for the aviation sector, warning that the proposals threaten to derail Kenya’s standing as a regional logistics hub.

“The proposed VAT will have an unintended impact on horticultural exports, with freight costs increasing to cover RDL, VAT and IDF, with a possible increase of between 18 per cent and 20 per cent in freight cost. Other sectors to suffer include emergency imports and pharmaceutical products, amongst other imports,” said Agayo Ogambi, chief executive of SCEA.

Ogambi noted that the government should retain the VAT exemptions on aircraft, helicopters, aviation navigation equipment and spare parts to keep maintenance costs manageable.

“Higher aviation taxes will increase export logistics costs and reduce Kenya’s competitiveness in international markets, particularly against regional competitors such as Ethiopia and Rwanda that continue to provide supportive fiscal frameworks for aviation growth.”

Both SCEA and KAAO said that fewer registered aircraft and more deregistrations due to a high tax regime could reduce taxes to KRA and revenues for State-run sector agencies and regulators such as the Kenya Civil Aviation Authority. 

 It could also result in possible shutdown of maintenance, repair and overhaul centres in the country, as the high cost of maintenance drives carriers that would repair their equipment in Kenya to other MROs in the region.