16 per cent VAT will hurt aviation sector's growth

Africa’s potential is too often underestimated. Few appreciate that the continent possesses some of the world’s largest freshwater reserves, the greatest expanse of uncultivated arable land, abundant mineral wealth and a rapidly growing pool of human capital.

Yet despite these advantages, Africa remains unduly reliant on external assistance. With deeper economic integration and stronger intra-African trade, the continent has the market scale to become one of the world’s most prosperous regions.

Poor connectivity is perhaps the principal reason Africa remains an economic laggard. The continent’s road and rail networks are chronically underdeveloped, making it difficult to move goods and resources efficiently across borders to where they are most needed.

Yet building the necessary infrastructure is a costly protracted endeavour, often taking years to complete. In the interim, aviation serves as a vital substitute, bridging gaps in connectivity and facilitating movement of people and commerce.

Yet many African governments continue to regard aviation as either a luxury or an easy source of tax revenue. This view is both misguided and economically self-defeating.

The proposals contained in Kenya’s Finance Bill provide a timely illustration. They would remove Value Added Tax (VAT) exemptions on aircraft goods and spare parts, as well as on aircraft navigation and direction-finding equipment.

In addition, the Bill proposes the application of charges such as the Railway Development Levy and the Import Declaration Fee to categories of helicopters and other aircraft that have previously been exempt. It also introduces withholding tax on payments to specialised technical services, including maintenance, regulatory compliance, technical and digital systems, areas that until now enjoyed tax relief.

The implications for Kenya’s aviation sector could be profound. Imposing VAT at 16 per cent would raise the cost of acquiring aircraft and modernising fleets, while increasing maintenance expenses across the industry. The result would be slower fleet expansion and delayed renewal programmes particularly among emerging carriers.

More broadly, higher operating costs would undermine domestic and regional connectivity, agricultural aviation, tourism-related transport and other aerial services. The burden would fall disproportionately on smaller operators and regional airlines, potentially weakening a sector that is critical to economic integration and growth.

Liz Aluvanze, chief executive of the Kenya Association of Air Operators, argues that higher taxes are counterproductive for Kenya’s aviation industry. Rather than expanding the tax base, she contends, punitive levies have accelerated aircraft deregistration, discouraged new registration and reduced revenue collections for regulators.

In a recent newspaper article, Ms Aluvanze cites evidence from the financial year 2023/24 where aircraft deregistration jumped to 74 equipment, according to the Kenya Civil Aviation Authority, attributable to taxes on helicopter leasing, chartering and hiring, a majority of which relocated to countries with tax-tree regimes on aviation.

Kenya Airways is not spared. Its Maintenance, Repair and Overhaul division is a significant source of revenue. The airline provides technical support to several regional and international carriers. A tax-free regime on aviation is based on International Civil Aviation Organisation recommendations and Kenya’s own National Aviation Policy.  Policymakers should therefore discard measures that risk undermining the sector’s competitiveness and long-term growth. 

Mr Khafafa is a public policy analyst