Why manufacturing is the biggest winner in budget

The manufacturing sector emerged as one of the biggest winners in the budget statement delivered by the Cabinet Secretary for the National Treasury.

Understandably, the Government has identified the manufacturing sector as one of its Big Four agenda and has set targets for growth and employment creation.

Based on data from the Kenya National Bureau of Statistics (KNBS), the contribution of the manufacturing sector to the country’s gross domestic product (GDP) dropped to 8.4 per cent in 2017.

However, the Government hopes that by 2022, the contribution of the sector to GDP will be 15 per cent. The CS expects this to increase manufacturing sector jobs by more than 800,000, with the sector expected to add between Sh200 billion and Sh300 billion to the GDP.

Special focus will be on boosting fish processing, agro-processing, leather and textiles sub-sectors. To this end, the Government has allocated resources with a view to modernising some key industries, developing regional-specific industrial clusters, developing basic infrastructure in selected Special Economic Zones (SEZs) and developing basic infrastructure for leather industrial parks and a common manufacturing facility for leather, among others.

Treasury has, for instance, allocated Sh400 million for the leather industrial park development and another Sh400 million for textile development.

Rivatex East Africa Ltd and New KCC are also set to benefit from allocations of Sh1.4 billion and Sh200 million respectively towards the modernisation of their facilities.

The Government has proposed a number of tax measures aimed at realising the manufacturing sector objectives.

The tax measures are mainly in the form of increased duty for imported products and tax incentives for the local market.

The main objective of the measures is to protect local manufacturers and industries from competition emanating from cheap and subsidised imports while at the same time encouraging local production and creating jobs for the youth.

Importers of paper and paperboard, textiles and footwear, timber products and vegetable oils have been hardest hit by the proposed tax measures, as import duty on these products is set to be increased from 25 per cent to 35 per cent.

The Government expects that these increased duties will make the affected imported products uncompetitive in the Kenyan market, hence boosting demand for similar products manufactured locally.

The CS has also proposed a remission of duty and exemption of value added tax (VAT) on a select number of inputs and raw materials.

These include raw materials and inputs for the production of pesticides and acaricides, inputs and raw materials for the assembly of clean energy cooking stoves, parts imported or purchased locally for the assembly of computers and raw materials for the manufacture of animal feeds.

Selected investors

These measures are expected to make locally manufactured products more affordable.

Mr Rotich also indicated that the review of the East African Community (EAC) Common External Tariffs, which is expected to be completed in the fiscal year ending June 2019, is currently underway.

Once completed, the CS expects the revised tariffs to enhance protection of industries in the EAC region. In addition, the Government has committed to implementing modalities that will bring down the cost of energy to about nine US cents (about Sh9) per kilowatt-hour for selected investors.

To meet this target, the Government will have to reduce the current cost per unit by more than 40 per cent.

This will mostly be through investment in cheaper and clean electricity sources such as geothermal electricity.

As a short-term measure, however, the CS has proposed an amendment to the Income Tax Act by allowing select manufacturers to claim an additional corporate tax deduction of 30 per cent of their electricity bills.

The move meant to boost the manufacturing sector is welcome considering that the industry has been on a downward trend in recent years.

There are a number of bottlenecks that the Government will have to address if it is to achieve its middle-term strategy of having the manufacturing sector contribute at least 15 per cent to the GDP by 2022.

Although the CS appears to have addressed some of them in his budget statement, we expect that issues such as the reduction of levies, investment in cheaper technology and introduction of practical training to college students will be addressed.

-Maurice Lugongo is a tax manager at Deloitte