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For aviation sector, VAT Act 2013 came with tax bumps in the air

Saturday September 27 2014
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A view of the Jomo Kenyatta International Airport (JKIA). The aviation sector is a key pillar of tourism in Kenya. FILE PHOTO | DIANA NGILA |

Plans to overhaul Kenya’s 1989 Value Added Tax (VAT) Act were first announced in June 2010, and a draft bill was published in August 2011, with public forums held in January 2012.

The VAT Bill 2012 was published in June of that year, and an updated version in June 2013. The VAT Bill 2013 was enacted into law on August 14, with a commencement date of September 2, 2013. The effect of the new Act was immediate and Value Added Tax — in some quarters known as Very Annoying Tax — was instantly felt.

For the aviation sector, the VAT Act 2013 came with tax bumps in the air. By exempting VAT on small aircraft and charging the same on big ones, the VAT Act 2013 created turbulence which had the danger of slowing down investments in the aviation sector.

The aviation sector is a key pillar of tourism in Kenya as it contributes a fair share of foreign currency to the country. Even as we diversify our foreign exchange earning capacity from tourism, as a country we need to support the aviation sector which is a critical mode of travel for many tourists.

When aircraft are affordable, for example through VAT, exemption, investing in the aviation sector becomes lucrative. Through increased investment in the aviation sector, as the basic law of supply and demand suggests, airfare becomes affordable.

This will result in an increase in local and international air travel. The investors will be happy with the profits and so will the government which will generate more income from tax.

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But the question remains, how will Kenya show consideration and directed thought process towards a sector that the legislation seems to have confused on taxation of its basic assets of trade — aeroplanes and aircraft?

The VAT Act 2013 was envisioned to be a simpler and more efficient law for VAT administration.

Part I of the First Schedule to the VAT Act 2013 exempts helicopters of an unladen weight not exceeding 2,000kg (tariff code 8802.11.00), helicopters of an unladen weight exceeding 2,000kg (tariff code 8802.12.00), aeroplanes and other aircraft of an unladen weight exceeding 2,000kg (tariff code 8802.20.00). This was okay while it lasted.

The VAT Amendment Act of 2014, which was designed to address the apparent conflict in description and tariff codes, and became effective on May 29, appears to have gone to the other extreme.

The amendment substituted tariff 8802.20.00 with aeroplanes and other aircraft of an unladen weight NOT exceeding 2,000kg. By virtue of exclusion, the supply or importation of aeroplanes of unladen weight exceeding 2,000Kg is subject to VAT. This is a source of concern for players in the aviation industry.

Exemption
Under Part II of the First Schedule to VAT Act 2013, Paragraph 18 provides that the hiring, leasing and chartering of aircraft is exempt from VAT. This makes the leasing of aircraft more appealing than outright purchase.

VAT is a consumption tax to be borne by the final consumer. In a perfect economic environment where market forces work, VAT charged on the purchase of such aeroplanes should be transferred to the final consumer, in this case, the passenger.

However, Since VAT on transportation of passengers by air carriers on international flights is zero-rated, only domestic flights bear VAT, making it expensive to fly locally.

This reduces the frequency of domestic flights and the effect trickles down to the sector which by and large is known to have thin margins.

For the bigger airlines engaged in international flights, by virtue of zero rated sales, their input VAT relating to making these taxable supplies will be refundable. However, given the backlog on VAT refunds the amendment Act was supposed to ease the burden of financing VAT by exempting VAT on the purchase of all aircraft.

In an effort to move forward and grow the industry, the supply or importation of aeroplanes of unladen weight exceeding 2,000kg should be exempt from VAT. By so doing Kenya becomes competitive, lucrative and open to investment in the aviation sector. This also aligns well with the plans to make Jomo Kenyatta International Airport the aviation hub in Africa.

Finally, effective July 1, 2013 Railway Development Levy is payable on the customs value of all goods imported into Kenya for use in Kenya. This levy has been phenomenally successful in building up the fund for the standard gauge railway.

Perhaps such a levy should be used to develop airports which have a direct bearing on the aviation sector.

The aviation sector players can only hope that the proposed amendments to the Finance Bill 2014 will consider their dire circumstances and smoothen out the turbulence that is VAT on aircraft imports.

Francis Musyoka is a senior tax advisor with KPMG Kenya. The views and opinions expressed in this article are those of the author and do not necessarily represent those of KPMG.

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