New tax sets stage for tough times in air travel and tourism

The cost of international air travel in Kenya could increase following proposals by the Treasury to introduce taxes on the service.

Tour operation and travel agency services including travel, hotel, and holiday could soon attract value added tax (VAT) at 16 per cent if Parliament approves proposals contained in VAT Bill 2012 published last week by Finance minister Njeru Githae.

Both segments of services are exempted from taxation and service providers may opt to pass on the proposed extra costs to consumers.

“The new taxes will have a direct effect on the cost of these services that have been enjoying exemption from taxation,” Mr Martin Kisuu, a partner with audit and accounting firm, PKF said.

Aviation, tours, and travel agency services are critical in the sound performance of the tourism industry that remains one of the country’s main foreign exchange earners.

The industry earned a record Sh98 billion last year driven by visitors from Britain and the United States, the main source markets for Kenya.

Analysts, however, warned that increased cost due to higher taxes on the international air transport and tour operation and travel agency could affect the performance of the interlinked sector such as tourism.

“The airline industry is a low margin business and the introduction of taxes will only worsen their position,” Mr Kisuu said.

The tourism industry is threatened by threats of terrorist attacks in Nairobi, Mombasa and Mandera and the introduction of VAT on international air travel and agency services could worsen the situation.

The terror attacks have seen Britain, the US and Australia warn off their citizens following the killing of tourists in the coastal resort of Lamu.

Travel bookings from the UK plunged 61 per cent in the first quarter of this year alone.

Despite major challenges such as high costs of operations that affected their margin, several airlines have been aggressively working to boost their international routes and the proposed tax measures could affect their dreams.

Profit drop

National carrier Kenya Airways is among the airlines that are already feeling the heat of higher costs operations.

The company reported a drop in net profit in the year to end-March to Sh1.7 billion from Sh3.5 billion last year after oil prices rose, sending its direct costs up by 44 per cent to Sh77 billion. Its revenue, however, increased by a quarter to Sh107 billion, buoyed by higher passenger and cargo traffic.

Kenya Airways CEO Titus Naikuni told an investor briefing in Nairobi last week that the airline would focus on a raft of cost-cutting measures including procurement, staff productivity and fuel costs.

He said a move to bring together carriers under the African Airlines Association to buy fuel jointly in bulk, would save the airline $2 million (Sh170million) this year.