Spare Dreamliner engine costs airline Sh400m in tax

Kenya Airways said Tuesday it had paid more than Sh700 million in taxes since September last year when the government imposed a 16 per cent value added tax on aircraft spare parts.

The carrier said it expects to pay another Sh400 million to the Kenya Revenue Authority for a spare engine being delivered together with the Dreamliner next week.

“From September 2013 when the Value Added Tax Act came into force imposing 16 per cent VAT on aeroplane spare parts, we have paid over Sh700 million in taxes,” Kenya Airways tax manager Beatrice Njagi told members of the National Assembly Finance Planning and Trade Committee.

She made the disclosures as stakeholders from the aviation industry petitioned the committee to consider exempting aircraft of below 2000 kilogrammes from taxation.

Kenya Airways share closed the day at the Nairobi Securities Exchange at Sh13.10 compared to Sh13.50 last Friday.

Mathioya MP Clement Wambugu led the stakeholders in pleading for exemption on light aircraft spare parts, saying it was affecting operations at the Wilson Airport.

READ: Light aircraft operators want spare parts exempted from 16 per cent VAT

However, Treasury principal secretary Kamau Thugge objected to the request for exemption of light aircraft from paying tax, saying the measure was intended to encourage leasing instead of purchase of aeroplanes.

“Spare parts are taxable goods,” Dr Thugge said, defending the tax on parking, landing and navigation, which the stakeholders also wanted removed.

The airline industry is lobbying lawmakers to have the Treasury provide more incentives to the sector, which also complained that delayed refunds were straining their cashflows.

Ms Njagi said Kenya Airways was owed more than Sh1 billion in refunds.

“We are paying more than Sh200 million monthly as KQ in taxes, but the law only allows KRA to refund us Sh50 million per month per customer,” Ms Njagi said.

Dr Thugge admitted there was a backlog of refunds arising from the old VAT law, which needed to be retired. He said a law would be put in place prescribing how long refunds would take and consequences for failure.

“We are working on a Tax Procedure Bill, which will lock in days to refund taxpayers and the consequences for failing to adhere to the set timelines,” Dr Thugge said.

House committee chairman Benjamin Lang’at asked the Treasury to fast-track the Bill in order to address the issue of tax refunds.

The aviation industry players sought exemptions for goods on transit, parking, landing and air navigation services whose tax is mostly collected in advance.

READ: KQ to receive Dreamliner by April 4

The Kenya Association of Air Operators said VAT on the lower weight category (2,000 kilogrammes and below) had affected training, employment and maintenance forcing some operators to relocate to other countries.

“Safety is of concern when operators are unable to import parts. Aerial police survey and security has been affected. At the end, all the costs will be forwarded to local or international travellers. Flying has become very expensive,” said Captain Wambugu.

Last year, KQ won a multi-million-shilling battle over a tax waiver against KRA. Since 2011 the taxman had demanded settlement of underpaid tax, as well as penalties and interests, running into hundreds of millions of shillings.

After a two year battle the airline settled the undisclosed principal demanded by KRA in the year to March 2013.

KQ applied for a waiver of the penalties and interest on the principal amount which it received, the airline’s financial director Alex Mbugua confirmed.

The tax issue broke in 2011 when KRA carried out an audit of KQ’s indirect taxes and established the carrier had underpaid the taxman. The taxes covered the period before 2007.