Experts push for VAT exemption on all aeroplanes

For the aviation sector, the value added tax (VAT) Act 2013 came with tax bumps in the air. By exempting VAT on small aircraft and charging it on bigger planes, the Act created turbulence which had the danger of slowing down investment in the aviation sector.
The aviation sector is a key pillar to tourism in Kenya. It contributes a fair share of foreign currency to the country. Even as the country seeks to diversify from tourism to boost foreign earnings, it is time to support the aviation sector which is a critical mode of travel for many tourists.
If aeroplanes are exempted from tax, they will be affordable, making it lucrative to invest in the aviation sector. More airlines will mean a drop in airfare.

This will also result in an increase in local and international air travel. Investors will be happy with the profits and so will the government which will receive higher taxes on income generated in Kenya.

The question remains, how will Kenya deal with the tax issue?
The VAT Act 2013 was envisioned to be a simpler and more efficient. In so doing, Part 1 of the First Schedule to the VAT Act 2013 exempts helicopters of an unladen weight not exceeding 2,000kg (tariff code 8802.11.00), helicopters of an unladen weight exceeding 2,000kg (tariff code 8802.12.00), aeroplanes and other aircraft of an unladen weight exceeding 2,000kg (tariff code 8802.20.00).

This was okay while it lasted.
The VAT Amendment Act of 2014 which was designed to cure the apparent conflict in description and tariff codes and became effective on May 29, 2014, appears to have gone to the other extreme. The amendment substituted tariff 8802.20.00 with aeroplanes and other aircraft of an unladen weight not exceeding 2,000kg.

By virtue of exclusion, the supply or importation of aeroplanes of unladen weight exceeding 2,000 kilogramme is subjected to tax which has been a source of concern for players in the aviation industry.
Under Part II of the First Schedule to VAT Act 2013, paragraph 18 states that the hiring, leasing and chartering of aircraft is exempt from VAT. This makes the leasing of aircraft more tax appealing than purchase.
VAT is a consumption tax to be borne by the final consumer. In a perfect economic environment where market forces work, tax charged on the purchase of such aeroplanes should be transferred to the final consumer, in this case, the passenger.
However, since VAT on transportation of passengers by air carriers on international flights is zero-rated, only domestic flights bear VAT, making it expensive to fly locally. This reduces the frequency of domestic flights and the effect trickles down to the sector which by and large is known to have thin margins.
For the bigger airlines on international routes, by virtue of zero-rated sales, their input VAT relating to making these taxable supplies will be refundable. However, given the backlog on refunds, the Amendment Act was supposed to ease the burden of financing tax by exempting VAT on the purchase of all aeroplanes.
In an effort to move forward and grow the industry, the supply or importation of aeroplanes of unladen weight exceeding 2,000kg should be exempt from VAT. By so doing, we will become competitive, lucrative and open to investment in the aviation sector. This also aligns well with the plans to make Jomo Kenyatta International Airport the aviation hub in Africa.

Finally, from July last year the Railway Development Levy was introduced on all goods imported into Kenya. This levy has been successful in building up the fund for the standard gauge railway.
Perhaps such a levy should be used to develop airports which have a direct bearing on the aviation sector unlike the standard gauge railway.
The aviation sector players’ can only hope that the proposed amendments to the Finance Bill 2014 will consider their dire circumstances and smoothen out the turbulence that is the VAT on imported aeroplanes.

Mr Musyoka is a senior tax advisor KPMG Kenya. The views and opinions are those of the author and do not necessarily represent the views and opinions of KPMG.