Kenya will lose its regional aviation competitiveness to its neighbours if the Treasury proposal to impose value-added tax (VAT) on imported aircraft and drones is approved by Parliament, aviation lobbyists have said.
The Association of Air Operators (KAAO) and the African Airlines Association (AFRAA) said the proposed imposition of 16 percent VAT will spell doom for the local aviation industry.
The associations told the National Assembly’s Committee on Finance and National Planning that the Finance Bill 2024, which seeks to remove tax exemptions to the aviation sector, will hit the expansion of new areas like Unmanned Aircraft Vehicles (UAVs).
“The intended removal of VAT exemptions will have a direct impact on our regional competitiveness and impact the advancement of Kenya’s aviation sector,” Mbuvi Ngunze, the KAAO chairman said.
“Policymakers must realise the multifaceted implications of such actions and priortise strategies to safeguard these critical exemptions in line with both the International Civil Aviation Organisation (ICAO) and the East African Common External Market Tariff on zero-rated taxes on aviation.”
Mr Ngunze told the committee that the effect of imposing VAT on the importation of aircraft will, for example, result in a $576,000 (Sh74,928,591.49)rise in the cost of a Cessna 208 Caravan plane and $140,800(Sh18,322,569.97) in engine overhaul for Bombardier Dash 8-200 plane.
The Finance Bill 2024 seeks to reverse the tax exemptions granted to the aviation sector in the Finance Bill, 2023.
The Treasury is seeking to introduce 16 percent VAT on the importation of aircraft and spacecraft, direction-finding compasses, instruments, and appliances for aircraft.
The Bill also seeks to impose 16 percent VAT on hiring, leasing, and chartering of fixed-wing aircraft, helicopters, UAVs, and balloons.
Mr Ngunze told the committee that the effect of imposing 16 percent VAT on the importation of aircraft will, for example, result in a $576,000 (Sh74,928,591.49) increase in the cost of a Cessna 208 Caravan plane and $140,800(Sh18,322,569.97) in engine overhaul for Bombardier Dash 8-200 plane.
It currently costs $3,600,000(Sh468,809,110.30) to import a Cesna 208 and $880,000(Sh114,628,316.66) to import a Bombardier Dash 8-200 engine for overhaul, respectively. With VAT it will cost $4,176,000(Sh544,136,129.41) to import a Cesna 208 and engine overhaul to $1,020,800(Sh133,020,073.91) to ship in Dash 8-200 engine.
He said the tax regime in Tanzania, Uganda, Rwanda, Nigeria, Angola, Mozambique, and Malawi enjoy different incentives in line with both ICAO and the East African Common External Market Tariff on zero-rated taxes on aviation aimed at growing the industry.
Mr Ngunze said introducing taxes will make Kenya uncompetitive regionally and within Africa. He said in Tanzania, the importation of aircraft, aircraft engines, or parts is VAT exempt, while Uganda has zero-rated indefinitely on leased aircraft, aircraft engines, spare parts for aircraft, aircraft maintenance equipment, and repair services.
In Rwanda, Mr Ngunze said aircraft, their spare parts, and maintenance tools are VAT exempt while in Nigeria, Angola, and Mozambique they have zero-rated imports of commercial aircraft, aircraft, and parts. Malawi has exempted the importation of aircraft and spacecraft from VAT.
“Introducing VAT on importation of helicopters and spacecraft under Chapter 88 of the VAT Act will result in Kenyan operators losing their competitiveness due to increased cost of purchase, leasing or financing of these equipment,” Mr Ngunze said.
“This, in turn, will result in increased operational costs which will be cascaded down to the customers and travelling public.”
Mr Ngunze told the committee chaired by Molo MP Kuria Kimani that increased costs will also discourage investors from registering aircraft in the Kenyan registry hence impacting revenue generated by the Kenya Airports Authority (KAA) in the forms of fees and levies.
KAAO and AFRAA the introduction of 16 percent VAT will precipitate a significant surge in acquisition costs for airlines and operators which will impede fleet modernization and expansion.
“This will also make Kenya uncompetitive to investors due to the huge costs of acquisition thereby losing out on the international arena since investors will opt for countries that have less tax implications,” Mr Ngunze said.
“This will also trigger escalations in air travel and charter services, cargo services, aerial services, Unmanned Aerial Vehicles (UAV) services, balloon operations, aircraft repair, and training prices, thereby impeding the sector’s growth trajectory in maintaining and developing Kenya’s air transport system.”
He said VAT on direction-finding compasses, instruments, and appliances will translate to higher costs for aircraft maintenance which has safety implications the costs will be extremely high.
He said this will hurt local aircraft maintenance organisations since it will be cheaper to outsource maintenance activities in other countries within the region resulting in a loss of jobs.
“The introduction of VAT on hiring, leasing, and chartering aircraft poses a significant risk of escalating operational costs.”
