Rotich scraps tax holiday for rural-based companies

Treasury secretary Henry Rotich has scrapped tax incentives for large manufacturers setting up in rural areas, ending a long-running policy which analysts say has cost the government billions of shillings in tax revenue without realising the goal of luring investors away from major towns.

The government in 1991 introduced a 150 per cent tax deduction for capital investments of Sh200 million or more spent on industrial buildings and machinery outside Nairobi, Mombasa and Kisumu.

The move was informed by the fact that most industries were concentrated in major towns that were attractive due to their proximity to major markets and relatively better transport, communication and utilities.

This concentration had in turn led to massive rural-urban migration, further expanding the economic gap between towns and rural Kenya.

Mr Rotich is set to terminate the policy through the Finance Bill 2015 that proposes deletion of the tax incentives provided for in the second Schedule of the Income Tax Act.

The removal of the incentive comes into force in January next year. Analysts, including the Institute of Economic Affairs have criticised the tax incentive, saying it has cost the government billions in lost revenues without significant success.

“There is no evidence that investors have invested in rural areas. In addition, there are also challenges in defining what constitutes areas outside these municipalities,” the think tank said in an earlier report.

The institute estimates the cumulative revenue loss from the 24 year-old incentive at more than Sh50 billion, with the annual loss running at over Sh4 billion each fiscal year.

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The tax deduction is claimable on the capital investment once manufacturing commences, leaving such investors off the hook for several years.

Its termination is expected to further boost concentration of industries in the major towns that have traditionally hogged large investments.

Nairobi has the largest concentration of manufacturers such as East African Breweries (EABL), British American Tobacco (BAT), and Coca-Cola bottlers among others.

Kisumu and Mombasa also have sizable manufacturing businesses.

Scrapping of the incentive is seen as an affirmation of the fact that investors attach a premium to good infrastructure, availability of skilled manpower and access to markets as opposed to periodic tax waivers.

Manufacturers, in particular, need reliable electricity and water supply to run their operations and disruption in the provision of these inputs can lead to major losses.

Proximity to airports, seaports, and transnational highways is also critical as it cuts overall transport costs for those exporting to regional and international markets.