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Why we need more than tax incentives to spur economic growth

By Wangui Mwaniki and Imelda Mutiso | Published Sun, June 24th 2018 at 00:00, Updated June 23rd 2018 at 22:43 GMT +3

When Treasury Cabinet Secretary Henry Rotich read the budget speech, a lot of focus was placed on the Big 4 agenda. The overarching objective of the agenda, which is anchored on Vision 2030’s Medium Term Plan III is to achieve job creation and ensure that basic human needs are met.

The four priority areas are manufacturing, universal health coverage, affordable housing and food and nutrition security.

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The budget speech focused on various policy measures including tax incentives to steer the agenda in the right direction.

However, it is important to remember that tax incentives on their own cannot deliver the desired results and the Cabinet Secretary in his speech acknowledged that there are other factors that influence an investor’s decision including good infrastructure, security and political stability.

Manufacturing sector

The manufacturing sector’s contribution to GDP is expected to increase from 9 per cent to 15 per cent by 2022. This is expected to create at least 800,000 new jobs. One of the cost drivers in the manufacturing sector is power. In his speech, the Cabinet Secretary proposed to extend an additional 30 per cent tax deduction on the actual power bill which means that manufacturers will enjoy 130 per cent tax deduction in respect of power bills. This is in addition to the reduction of power costs for the sector at night.

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While the sector is also incentivised through creation of Special Economic Zones which already enjoy preferential tax rates, this year’s Budget also saw introduction of a protectionist approach. This is intended to protect the textile and foot wear industry, paper & paper products and iron ore and steel industries by increasing the import duty rates for the importation of commodities related to this sector.

Rotich also announced the establishment of a multi-agency team to curtail illicit counterfeit trade. Additionally, parts imported or manufactured locally for assembling of computers were also exempted from VAT.

However, to incentivise the sector further, the Government could rationalise the existing incentives and consider introducing VAT remission for start-ups with heavy initial capital outlay to free up working capital.

Incentivising food security

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Agriculture is the key enabler in ensuring food security in Kenya. Agriculture has for a long time remained the backbone of our economy and a major foreign income earner through export of horticultural products. The speech recognised the need to embrace large-scale production. Under this initiative, 700,000 acres of land will be placed under the Public Private Partnership.

In addition, the Government seeks to promote investments in post-harvest handling as well as adopting contract farming and other commercial off-taking arrangements, including supporting the development of agro parks or hubs to serve as a link to farmers and markets.

However, one of the major challenges is the over reliance of primary agriculture on rain and the CS allocated Sh8.5 billion for on-going irrigation schemes and programmes. Large-scale agriculture production calls for heavy mechanisation. While the Cabinet Secretary allocated Sh0.5 billion for mechanisation, there may be a need to enhance capital allowances for the agricultural sector.

Additional tax incentives that the Government could consider to address some of the challenges hindering food security include exemption from VAT of irrigation equipment, hematic bags and other food storage facilities.

However, there was no mention of incentives to promote value addition to address the perennial challenge of food wastage.

Incentivising healthcare

The Government is keen to ensure universal health coverage for all Kenyans by 2022. Among the key initiatives proposed are the reform of the National Health Insurance Fund (NHIF) and private insurance. Already, the Government has rolled out a comprehensive NHIF medical scheme for secondary school students.

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Rotich in his speech also announced that the central government would work with county hospitals to ensure adequate provision of specialised medical equipment and increase in health facilities. A pilot to ensure provision of universal healthcare would be rolled out in Kisumu, Nyeri, Machakos and Isiolo in the course of the year.

Incentivising affordable housing

Currently, Kenya has a deficit of approximately two million housing units with majority of urban dwellers living in informal settlements. The current deficit in urban centers stands at 200,000 units annually and according to the Cabinet Secretary in his speech, is likely to rise to 300,000 units by 2020 under the current housing policies.

The Government intends to bridge this deficit by creating 500,000 new homeowners by 2022; this initiative will be achieved through the creation of public private partnerships.  

To surmount the challenges affecting investment in this sector, the CS announced a number of tax and non-tax incentives. Among the key enablers was the facilitation of access to affordable mortgages through the Kenya Mortgage Refinance Company incorporated in April 2018.

Additionally, Rotich proposed the establishment of a National Social Housing Development Fund to complement the role already played by the National Housing Corporation. The Fund will be financed through an amendment to the Employment Act requiring employees to each contribute 0.5 per cent of their monthly gross emolument.

The employer will match the employees’ contribution subject to a maximum of Sh5,000. However, there was no mention on how those who are not in formal employment would contribute to the fund.

Investors who construct 100 units per year, already enjoy a reduced income tax rate of 15 per cent.

Whilst tax incentives can help to foster growth, they need to be deliberate, targeted and their impact on the desired outcome measured periodically in order to avoid abuse and to demonstrate their effectiveness.

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—Wangui Mwaniki is a Senior Manager and Imelda Mutiso is a Senior Associate with PwC Kenya’s Tax practice.


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