Why CS Rotich’s tax incentive to developers is untenable

That there is biting shortage for low-cost housing in Kenya is not debatable. Treasury Cabinet Secretary Henry Rotich last Wednesday rose to give a proposal for what he thought would be a solution to this problem.

Rotich proposed an incentive to encourage investors to venture in this sector by reducing the rate of corporate tax from 30 per cent to 20 per cent for developers who construct at least 1,000 units annually.

Though well intended to bridge the demand and supply of low-cost housing, both its viability and applicability have been questioned. Many players in the industry dismiss it as untenable.

Financial services advisory firm Grant Thorton’s Tax and Advisory Partner Parag Shah in a post-budget forum last Friday said it was almost impossible for a single investor to put up so many units within a year.

National Construction Authority (NCA) Manager for Research and Business Development David Mathu echoes the same sentiments saying the authority is not aware of any developer currently who can construct such a number of units in a year.

“The Government should perhaps think of bringing down the number of units constructed annually by developers, in order to make the tax waiver tenable. The current 1,000 is too high even for us at the NCA to endorse. The industry is not so well expanded to attract investors with such big muscle,” Mr Mathu said.

However, the NCA official argues that the issue of reducing corporate tax in fact does not matter and will not help the industry. What matters is getting finance for developers to put up more units.

tax waiver

“The Government should do facilitation for the industry, whereby it negotiates with banks to get developers the financing they need to put up houses with low interest rates. That is what will help low income earners get affordable housing,” Mathu adds.

Samuel Maina, Chairman of Urithi Housing Cooperative Society in Kiambu County says Rotich’s tax incentive was a disappointment since neither his start-up firm nor so many others he knows can put up 1,000 units in a year.

“People like us who run start-ups in construction cannot attain even half of that. It needs a big time investor perhaps foreign to put up such a big number of units. Yet the government has been promising to promote startups in the construction sector with low interest loans and tax incentives in order to solve the problem of low cost housing,” Mr Maina told Business Beat.

Maina adds that they target to construct 100 units every three months which means they can only construct 400 units in a year. “If the government really wants to help the industry, they should put a tax waiver for at least each two houses a developer puts up. That is how start-ups like ours can be empowered to deliver low cost houses,” he added.

Harun Nyamboki, director at Moke Gardens, another housing development company says the Government’s estimates are impossible to achieve, and the tax waiver doesn’t help at all. Mr Nyamboki says for the tax waiver to be of any meaningful help, the Government should reduce the number of units one needs to construct from 1000 to 100, since many players in the industry can only achieve that level.

“The cost of construction in this country has gone over the roof, and I don’t see many of us developers helping the Government in putting up low-cost houses. Even without touching the taxes, I think the most important thing the State should do is put up proper infrastructure that can help developers access areas to develop. Roads, sewerage systems and the like can make it cheap to access areas we want to develop,” Nyamboki says.

Mr Shah of Grant Thorton, however, thinks the Treasury’s decision to do away with NCA and National Environmental Management Authority (Nema) levies that for long kept construction costs up, was the best thing the industry got from the budget.

housing crisis

For long, players in the construction industry like Nyamboki, who was elated that the levies were scrapped, blamed the levies for keeping the costs high unnecessarily, and lobbied the Treasury hard to do away with them.

“Those levies added no value to the national kitty. Their main purpose was to fund NCA and Nema budgets. I think now that these two government agencies have made enough money, they no longer need them and therefore they have been scrapped,” Shah says.

The big elephant in the room is the housing crisis currently being experienced especially in urban areas that has become hard to solve. Last month, a poorly constructed house in Huruma went down leading to more than 50 deaths. The tragedy exposed just how urban dwellers find it difficult to access good quality and affordable houses, which can guarantee safety for their inhabitants.

Nairobi City Council has already given an alarm warning people to stop trooping to overpopulated estates such as Pipeline Estate, where County Executive in charge of Urban Planning and Lands Christopher Khaemba said population estimates have reached to more than 100,000.

Whether the urban housing crisis will go away or will leave to haunt the city dweller for years to come is for the Government to decide through its future policies targeting the construction industry. —[email protected]