Landlocked countries that import goods through Mombasa port could see a significant rise in the cost of goods when sections of the Kenya Finance Act 2014 come into force from July 1.

Transporters are warning of a possible 10 to 12 per cent increase in freight charges thanks to recent changes to the VAT law.

In a tax alert to its clients last September, the accounting firm PriceWaterhouse Coopers said that while the supply of taxable services in respect of goods in transit was previously zero rated under the repealed VAT Act, the Finance Act 2014 had changed services relating to goods transiting through Kenya to inland countries from zero rated to exempted services.

“By exempting these services, transportation companies will not be entitled to input tax recovery on the same percentage of VAT paid on their purchases equal to the percentage of revenue earned for transit cargo. This will increase the cost of doing business in Kenya and ultimately increase the cost of transit goods,” the firm said it its alert.

The EastAfrican has learnt that sections of the Kenyan freight industry engaged the Kenya Revenue Authority over the development on March 31, but the tax collector said the power to correct the anomaly lies with the Treasury.

On April 10, Kenya Uganda rail concessionaire Rift Valley Railways in conjunction with Spedag-Interfreight were expected to submit a lobby paper to the Treasury, seeking a reversal of the move on VAT. Separately, the Kenya Association of Transporters was preparing another lobby paper. 

While the Kenya Treasury is expected to save significant amounts from forgone input VAT refund claims, PwC estimates that to net out the economic impact of this tax change on transporters be it in the rail, road, and pipeline categories, will increase prices into Uganda by 10 per cent to 12 per cent. 

Using the example of a transporter who earns 70 per cent of its revenue from goods in transit to neighbouring countries but encounters operational and capital expenses that result in paying $3.5 million in VAT on purchases, PWC said that under the new rules 70 per cent of the $3.5 million paid cannot be accounted for input tax recovery.