Oil explorers want sector goods, services zero-rated

Oil and gas explorers want Parliament to zero rate goods and services supplied to them in order to ease the cost of prospecting.

Tullow Oil, Africa Oil and Dominion Petroleum Limited asked the National Assembly’s Finance, Planning and Trade committee to consider removing the 16 per cent Value Added Tax (VAT) on exploration funding.

Tullow Oil Business manager Reshma Shah told the committee, chaired by Ainamoi MP Benjamin Lang’at, that oil and gas exploration was a high risk venture with no guarantees of success.

“Oil and gas companies take 100 per cent of the risk during the prospecting and exploration phase. No income is generated during the prospecting and exploration phase,” Ms Shah said.

The committee met representatives of various organisations to listen to their views on the Value Added Tax (amendment) Bill, 2013, which was published by Suba MP John Mbadi.

The Institute of Certified Public Accountants (ICPAK), Kenya Manufacturers Association and National Council of Churches of Kenya sought exemption on a number of items that are currently subject to tax.

Mr Mbadi’s Bill seeks to widen the list of goods and services exempt from taxation in a bid to cushion consumers from runaway prices of basic commodities.

Fishing and mosquito nets; milk and cream; materials, residues and by-products used in animal feeds; insecticides, rodenticides, fungicides, anti-spouting products, disinfectants, ambulances and hearses and crisp bread are among items the legislator seeks to make cheaper.

Others are credit reference bureau services, sanitary and pest control services provided to households, postal services, supply of electricity to households restricted to 200 kilowatt hours, water drilling services and supply of rural electricity.

Ms Shah said VAT on exploration activities amounted to a tax on investment. With the cost of drilling one well at $40 million (Sh3.4) billion, removal of the tax would enable a firm drill four wells from a budget of $200 million (Sh17 billion), up from three with VAT.

“VAT has a direct impact on petroleum activities, in particular exploration and appraisal, which could impact success of oil and gas in Kenya,” she said.

The exploration firms also petitioned the House to exempt special purpose vehicles uses in geothermal, oil or mine prospecting or exploration from taxation.

Ashif Kassam, who made a presentation on behalf of ICPAK, said VAT in the case of exempt supplies was irrecoverable and hence a cost which traders pass on to consumers.

Zero rating

ICPAK proposed zero rating of unprocessed agricultural and agro-forestry products such as tea leaves and sugarcane which now attract VAT.

ICPAK and the Kenya Association of Manufacturers also called for services in respect to goods on transit to be exempted from taxation.

“We need to also clarify the law with regards to taxation on intermediary services such as tour operators, brokerage firms among others,” said KAM chief operations manager Kennedy Muhochi said.

They also called for tax evaders to be penalised only two times the tax due, instead of five currently.

KAM also sought zero rating of all pharmaceutical products, cotton wool, sanitary pads and animal feeds which currently attract input tax.

The manufacturers said the exemption of pharmaceutical products from taxation had made products from local pharmaceutical companies uncompetitive because imports from China and India were cheaper.

NCCK general-secretary Peter Karanja asked the committee to exempt Bibles and Bible materials from taxation saying their cost had skyrocketed with the imposition of tax on books and learning materials.

The committee said it would look into the requests before proposing amendments to the Bill slated for debate tomorrow. The Bill has to be passed before MPs take Christmas recess on Thursday.

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