Presidential comments on VAT may cost Kenya’s airlines dearly


(Posted 28th March 2014)

In his first ever State of the Nation address to the joint session of Parliament did Kenya’s president Uhuru Kenyatta shut the door in the faces of those seeking changes in the present VAT bill, which the national assembly is in the process of amending to correct anomalies and reverse some of the worst impacts on the cost of daily necessities, often putting them beyond affordability for the poor.

Since the finance bill was passed in its present state last year, have various sectors made urgent representations, among them tourism to have the VAT charges on tourism services and in particular transport reversed, as the cost increases, combined with the negative perception abroad about stability and security in the country, has led to a steep decline in visitors to the Kenya coast and the country overall.

The aviation sector too has issues with the inclusion of spare parts for aircraft in the VAT bill, as it raised the maintenance cost by 16 percent, pushing up cost and subsequently airfares. National airline Kenya Airways was quite outspoken this week when lobbying members of the various house committees and the nation was shocked to learn that not only did Kenya Airways already cough up a billion Kenya Shillings for spare part VAT but that a further 400 million will become due on the 04th of April when the airline’s first B787-8 Dreamliner arrives, bringing with it a spare engine to be stored at KQ’s maintenance base in Embakasi to reduce downtime in case an engine needs changing. At the same time is Kenya Airways apparently owed hundreds of millions of Kenya Shillings by the Kenya Revenue Authority in tax refunds, slapping the national airline with a double whammy. ‘Our government fails to see the impact of such measures and the president is short sighted and badly advised if he now says there will be no change in the VAT bill. Does that mean if parliament adopts changes he will veto the bill and not sign it? Does he understand that these are cost increases for KQ which other airlines we compete with do not carry? Ethiopian for instance, or the likes of Emirates or Qatar Airways. Their tickets to India and China can be cheaper than those of Kenya Airways when they compete for passengers. Why would our fellow Africans want to fly Kenya Airways through Nairobi when it is cheaper to fly via Addis or Doha or Dubai? All we hear is words, hot air really, because reality on the ground is different and the downturn in tourism I lay squarely on the door of government. They failed the sector, they failed Kenyans and if they do not reverse VAT on aircraft spares, they will fail Kenya Airways also, a company in which they hold nearly 30 percent shares. What sense does that make I ask you’ commented a regular aviation source from Nairobi when discussing the content of the presidential address vis a vis tax measures.

Notably did President Kenyatta mention the infrastructure development at the country’s main airport, Jomo Kenyatta International, named after his late father who was Kenya’s founder president. Project Greenfield is aiming to add a second runway to the complex in addition to a new mega terminal which will provide a huge capacity boost to the airport and which features high in Kenya Airways’ own strategic forecast under ‘Plan Mawingo’, which intends to triple the fleet by 2022 and nearly double the destinations to 115. ‘If we have to absorb such absurd charges like VAT on aircraft spares for aircraft used on international routes, while KQ’s competitors do not suffer such added tax burdens, it may throw a spanner in the work of expanding fleet, destinations and grow passenger numbers for Kenya Airways. Higher cost means either less profits if we have to match ticket prices of our main competitors or else our fares are higher and passengers will migrate to airlines which offer better deals. Either way we lose out, so contrary to what the president suggests of a win win situation it is a lose lose and lose some more situation for the aviation sector in Kenya’ the source then added in a parting shot.

One other source however insisted that parliament will have the ultimate say over what elements of VAT they will removed in the amendment bill which will then go to the president for his assent, and should he refuse to sign it the bill may come back to the house where it can again be passed, as parliament continues to stake out greater powers versus the executive whose powers under the new constitution are now severely curtailed, compared to the past imperial style presidencies of pre constitution change Kenya.

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