Factories lose power cost rebate in tax proposals

Kenyan factories will lose the 30 percent refund on electricity cost in proposed amendments to tax laws, raising fears of elevated direct costs for industries after a short reprieve.

The Tax Laws (Amendment) Bill, currently before the National Assembly, proposes to remove the power incentive introduced in the Finance Act 2018, but which was only implemented last year.

The rebate allows manufacturers to deduct a third of the total cost of power from corporation tax paid to the Kenya Revenue Authority (KRA).

“Introduction of the rebate in 2018 was a welcome move for manufacturers as it would reduce their electricity cost, which is one of their significant direct expenses especially with the rising power costs. The introduction was seen as the government’s incentive to promote manufacturing in line with its Big Four Agenda,” tax experts at consultancy and audit firm KPMG said in an analysis of the bill.

“This will be a big blow to the manufacturing sector.”

The rebate rules give profit-making manufacturers a 20 percent refund on power costs, with the remaining 10 percent dependent on annual turnover, power consumption and capital expenditure.

The Kenya Association of Manufacturers (KAM) has singled out electricity bills as the biggest input cost for factories, accounting for an estimated 25 percent of total operating costs.

“You need to make power competitive for us to have import substitution and for us to be competitive,” KAM chair Sachen Gudka said in a past interview.

Large factories operating and producing between 10pm and 6am over and above their daytime optimal capacity are, however, still eligible to pay half the price of electricity following the introduction of night-time tariffs from December 1, 2017.

Findings of a research by Strathmore University and global business management software firm, Syspro, suggested in July 2019 that more than half of Kenyan factories operate less than eight hours a day.