Aviation industry struggles to keep up despite aircraft parts tax cuts

ICT Cabinet Secretary Eliud Owalo alights from a chopper at Lwanda Konyango grounds, Migori County on May 8, 2023. The tax cuts to the industry were seen to benefit politicians and the rich. [Caleb Kingwara, Standard]

When the Finance Bill, 2023 was made public in April last year, one of the clauses that kicked up a storm was the proposal to remove taxes on helicopters and aircraft parts.

Many Kenyans reacted angrily, noting how the Kenya Kwanza regime was quick to gift wealthy Kenyans tax cuts as the rest of them reel under heavy taxation. 

The Finance Bill – which has since transitioned into the Finance Act, 2023 – included the controversial housing levy, a higher Pay As You Earn (Paye) tax rate of 35 per cent for some employed Kenyans, while Value Added Tax (VAT) on fuel doubled to 16 per cent and turnover tax increased to three per cent from one per cent.

In the weeks that followed, aviation sector players would have a difficult time explaining to Kenyans, including a section of MPs, that while scrapping taxes on choppers and aircraft parts would indeed benefit wealthy Kenyans, helicopters and other aircraft are also essential for security operations, agriculture sector and medical evacuations. 

The sector players also argued that it employs many Kenyans directly and indirectly besides supporting other industries, including tourism and agriculture.

And now they say those opposed to the tax cuts may not be aware of the punitive tax regime that the industry had to grapple with. Mercy Mutiso, the accountable manager at Penial Air paints a picture.

“Before the Finance Bill, 2023 was passed, we would incur 16 per cent VAT and paid an import declaration fee, the Railway Development Levy, amongst others,” said Ms Mutiso.

And unlike motor vehicles, aircraft engines have to be shipped out for overhaul and shipped back in for reinstallation, a process Ms Mutiso said is not just costly but also hectic due to the bureaucratic clearance processes. 

“The operational cost of this industry is in millions. For you to send out an engine or part for overhaul, it would ideally take you around two weeks to clear it once it is back in. That, in turn, means you’re grounding your aircraft, and hence you’re out of business for two weeks. That is dreadful for an air charter company, to say the least. Remember this is a part you already own, not one you’re buying,” she explained.

Air charter operators like Penial Air, she says, are yet to feel the impact of the reduced taxes on the industry.

“Apart from the 16 per cent VAT on helicopters, this has not affected the charters on fixed-wing aircraft. These continue to be charged as usual. We also incur the VAT on jet fuel, which was bumped up from eight per cent to 16 per cent,” Ms Mutiso explained.

For many Kenyans, helicopters are a rich man’s affair, flying politicians and billionaires around.

But Ms Mutiso explained they have many essential uses, including medical evacuations, military operations and surveillance.

All these are services that are not the preserve of the wealthy and which are equally affected by the taxes in the air travel industry. The aviation industry is pivotal to the country’s financial position, hence the concern by the government, according to Captain Mary Mukulu, an aviation expert.

“We have to understand that the industry as a whole, not just in the country, brings in a lot of income. The move to remove taxes for this sector was more than welcome; considering the pivotal role it plays in tourism and increasing foreign currency reserves,” she says.

According to the Economic Survey of 2023, Kenya currently has 939 licensed Aircraft Maintenance Engineers and 726 aircraft with Valid Certificate of airworthiness. A background check shows that about a decade ago, there was concern from tax experts during the implementation of the Finance Act, 2014, which repealed the section that allowed for the exemption of tax on aircraft parts and helicopters under 2,000kg, provided for in the VAT Act, 2013.

“In an effort to move forward and grow the industry, the supply or importation of aeroplanes of unladen weight exceeding 2000kg should be exempt from VAT. By so doing we 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 number one aviation hub in Africa,” reads an excerpt from an article first published by KPMG. Erastus Kwaka, a managing partner at Crowe Erastus LLP, says the shift to neighbouring countries was caused by our uncompetitive nature.

“We at the Institute of Certified Public Accountants (ICPAK), made a lot of serious presentations and urged the government to exempt this service from VAT. The net result of this tax is that the country loses foreign exchange.”

Mr Kwaka notes that it will take a lot of convincing for the lost air maintenance business to return to Kenya.

Captain Kai Tinga, CEO Penial Air, insists that Kenya has an edge in the regional market. “We get jobs in Congo and Sudan, among other countries; jobs that are won through competitive bidding. Our neighbours in Tanzania and Uganda, for the longest time, have not been paying the taxes we pay. This outrightly makes their quotations cheaper, kicking us out,” he said. The Economic Survey released by KNBS in 2023 offers an interesting perspective on the aviation sector.

Principal value of imports of aircraft and associated equipment dropped by Sh2 billion from Sh17.8 billion in 2022 to Sh15.1 billion in 2023.

However, the number of aircraft moving through the Kenyan airports grew by 27.3 per cent from 253,981 in 2021 to 323,421 in 2022.