Kenya plans to remove all tax waivers given to foreign contractors undertaking government projects as part of ongoing efforts to raise revenue, stem dumping of duty-free goods and cushion local manufacturers.

A proposed move to subject the contractors to 25 per cent import duty in addition to the recently implemented value added tax (VAT) is expected to help even the playing field, especially in the infrastructure sector, where local contractors have found it difficult to compete. It would also reduce the importation of locally available goods, and expand the market for local manufacturers.

The government plans to spend at least Ksh290 billion ($3.4 billion) on infrastructure projects, in the current fiscal year that started in July, a huge chunk of which will be taken up by foreign contractors.

Local contractors and manufacturers’ pleas for fairness were amplified recently when Industrialisation Cabinet Secretary Adan Mohamed wrote to his National Treasury counterpart seeking inclusion of foreign contractors undertaking government projects in the tax bracket.

In an interview with The EastAfrican, Mr Mohamed said the current scheme –– which exempts the contractors from duties and taxes –– was denying the country much needed revenue and disadvantaging local businesses who are subjected to different tax rules.

Some foreign contractors, Mr Mohamed said, were taking advantage of the tax breaks to import the tax-free goods for sale in the local market, hurting local manufacturers of similar goods. These include cement and steel.

“Most of these projects are carried out by non-resident firms who also import the same goods that can be bought locally. There is, therefore, a need to ensure that all imports related to government projects are subjected to the same tax rules as for non-government projects to create a level playing field,” Mr Mohamed said.

Mr Rotich said the new reforms of the VAT law, which became effective a fortnight ago –– subjecting nearly all goods to a 16 per cent tax –– are likely to address some of these concerns. But still, contractors are not liable to pay Customs duty on the imports. The government expects reforms to the VAT code to raise at least Ksh10 billion ($117.6 million) as it has got rid of exemptions to the tax.

Harmonised taxation

Cement manufacturers have been pushing the government to revert to a high import duty of 40 per cent to protect local investments. Under the proposed scheme, contractors would now have to pay the 25 per cent import duty on cement, in addition to the 16 per cent VAT.

The proposal would put Kenya in line with the practice in its EAC partners Uganda and Rwanda, which charge taxes on all imports.

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In Uganda, that government institution that enters into a contract grants the tax waiver, pays the accruing duty on the goods in question. Otherwise inputs that can be locally sourced would have to be bought on the local market. Any absolute tax waivers would require clearance by the EAC Council of Ministers.

Tanzania exempts from tax contractors doing government projects. But Tanzania Revenue Authority officials conduct physical checks on the approved list of imports agreed upon during the signing of the project agreement. This was introduced to curb a situation where goods imported by the contractors duty free were finding their way into the local market.

The Rwanda Revenue Authority subjects all imported construction material to a 30 per cent duty and 18 per cent VAT.

Kenyan Treasury officials have stated that the government loses between Ksh40 billion ($470 million) and Ksh60 billion ($705.8 million) in VAT exemptions alone, highlighting the need to seal this loophole.

The Tax Justice Network-Africa (TJN-A) said Kenya loses an estimated Ksh100 billion ($1.2 billion) — three per cent of its GDP — in tax exemptions and incentives annually. In its latest report, TJN-A said Kenya had the most generous tax incentives regime in the region, exposing it to big losses from investments.

It is understood that top government officials are increasingly worried over the inability by authorities to police the implementation of the tax- and duty-free regime enjoyed by the contractors undertaking government projects.

Dumping

For instance, it is almost impossible to tell whether these imports are fully used for the intended projects, with concerns that a big chunk end up being sold in the local market.

“The solution would be to charge these contractors all duties and taxes and then they can apply for refunds once the projects are done and where applicable,” said Mr Mohamed, adding that the proposal was unlikely to be implemented with ongoing projects.

Manufacturers said Kenya needed to level the playing field. “It’s an obligation for everyone to pay tax and therefore all suppliers, both for non-government and government projects, should pay taxes,” said Polycarp Igathe, chairman of the Kenya Association of Manufacturers (KAM), the manufacturers’ lobby.

Kenya has lined up a number of big infrastructure projects, among them the standard gauge railway. Chinese firms have been the biggest beneficiaries of these projects and are currently eyeing four mega-infrastructure projects where basic formal agreements have been reached and are only awaiting a decision on financing.

These are the building of the standard gauge railway line between Mombasa and Nairobi, a greenfield airport terminal at the Jomo Kenyatta International Airport, the Lamu Port and the High Grand Falls hydroelectric project on the Tana River.

On August 19, President Uhuru Kenyatta, on a visit to China, secured $5 billion (Ksh425 billion) in investments from China covering railways, energy, wildlife protection and joint ventures.