Kenya Airways claims Sh2.6bn tax refund on new planes

What you need to know:

Kenya Airways is claiming the money as tax charged on new aircraft and spare parts purchased under the VAT Act 2013, which was later amended reversing the tax charge.
Former KQ chief executive Titus Naikuni had said the claim was a big strain on its cash flows, forcing it to take out expensive local loans to finance operations.
KQ argues that it is entitled to the refund for paying input tax yet some of its domestic air tickets, for instance, are exempt.

Kenya Airways has said it expects a Sh2.6 billion refund cheque from the Treasury for value added tax (VAT) paid last year on importation of new planes.

The airline, which last week reported a Sh10.5 billion after-tax loss for the six months ended September, is claiming the money as tax charged on new aircraft and spare parts purchased under the VAT Act 2013, which was later amended reversing the tax charge.

KQ says it has held talks with Treasury and the Kenya Revenue Authority (KRA) and it believes a significant part of the cash, if not all, will be paid from a Sh10 billion fund government says it has set up.

“We have been having discussions with KRA and Treasury about this refund and we expect that sometime in January or February, a significant part of it will be paid back to the business,” said Alex Mbugua, KQ’s finance director during release of the carrier’s half-year results on last Thursday.

Former Kenya Airways chief executive Titus Naikuni had said the claim was a big strain on its cash flows, forcing it to take out expensive local loans to finance operations.

READ: KQ plans to borrow more due to delayed tax refunds

The carrier has issued a profit warning for the full-year to March 2015, indicating that its performance will decline by at least 25 per cent of the previous financial year.

KQ accumulated the refund it is claiming now when the VAT Act 2013 came into force in September last year, removing exemptions on more than 400 items including aircraft spare parts.

Airplanes weighing over 2,000 kilograms, the bracket in which KQ’s fleet falls, were also subjected to the 16 per cent tax charge. Amendments made to the law through the Finance Act 2014 spared the airline the heavy tax burden, but left it with a huge refund claim.

KQ argues that it is entitled to the refund for paying input tax yet some of its domestic air tickets, for instance, are exempt.

Tax experts are, however, cautious about the government’s pledge to create a fund to pay off the claims, saying similar promises have gone unfulfilled in the past.

The backlog of VAT tax refunds currently stands at more Sh30 billion, which makes the Sh10 billion fund set aside by KRA insufficient.

“We need to wait and see whether the fund will indeed be set up or whether this was just another way of the government placating businesses,” said Nikhil Hira, a tax partner with financial consulting firm Deloitte.

“If the fund is set up, the government needs to clarify the criteria through which the money will be repaid. If the fund money is not enough, who gets it first and what amount do they get.”