Value addition tax Bill needs intense scrutiny
By By Dominic Odipo
| July 23rd 2012
By Dominic Odipo
One of the most effective and attractive mechanisms through which governments encourage heavy duty foreign or local investment is the remission or removal of local taxes that would otherwise be levied on the individuals or companies making such investments.
To encourage such investments, governments ordinarily grant various tax holidays or remissions, usually with a very keen eye on what their competitors are doing or planning to do.
Come and invest here, the investments promotion brochures might say, and you will pay no taxes of any kind for the first ten years. Or come and build a new factory here and all Value Added Tax (VAT) on your operations, before or after set-up, will not be paid.
In other words, remission of VAT or other taxes on income or expenditure is deployed as a very powerful investment magnet. If the taxes an investor can fore- go are higher here than in South Africa, for example, then presumably, the investor will elect to come here instead of South Africa, all other factors being equal.
Following the recent publication of the Value Added Tax ( VAT) Bill, 2012 this issue of well- calculated and focused tax remissions has suddenly been thrust into the limelight. Unfortunately, with so much more enticing and entertaining political news in the air, this Bill is not receiving the public attention or debate that it deserves.
Considering just how central this Bill could turn out to be in our efforts to meet our Vision 2030 aspirations and goals, this is really a great pity.
This week, a group of stakeholders from all the major sectors of the economy will congregate in Naivasha to carefully scrutinise this Bill and to try and determine or estimate what its impact on this country’s economic development in Vision 2030 period is likely to be, especially if Parliament passes it into law in the exact form in which it now is.
At the core of the scheduled interrogation of this Bill will be two crucial questions: On what businesses should the government’s VAT remission facility apply? And, second, if we can agree on the question of which businesses or enterprises these should be, at what point along the investment chain should the VAT remission facility begin to apply?
For an economy which is, as the Vision 2030 blueprint affirms, putting so much store on the development of a modern infrastructure and other large scale projects, these are crucial questions. To paraphrase, how should the VAT Bill be written so that it goes furthest in helping to generate as much foreign and local investment as possible?
If the medium term priority of the government is the massive expansion and improvement of the national infrastructure, then this VAT Bill becomes critically important. To achieve this objective, this Bill needs to clearly stipulate exactly which business enterprises will be able to benefit from the VAT remission facility and when this remission facility will begin to apply.
There must be no ambiguity whatsoever and there must be no discrimination between businesses or enterprises. In other words, the Bill must leave no doubt about the government’s commitment to encouraging as many legitimate businesses to set up shop here as possible. Investors, anywhere, do not like uncertainty.
For this Bill to achieve its primary objectives, it needs to state very clearly that all major investment enterprises being set up in this country during the Vision 2030 period will benefit from the VAT remission facility, not only from the date when their operations come on stream but also during the period of set up or design.
If, for example, a foreign company wants to come here and prospect for gold in Marsabit County, all the expenses it incurs before the first gold mine comes on stream should be exempted from all value added taxes. This is one of the most effective ways of getting such companies to come and prospect for gold here, instead of trying their luck in the Democratic Republic of Congo (DRC).
Currently, there are numerous business enterprises which stand to benefit directly from this VAT remission facility.
Among them are the geothermal enterprises focusing on the Naivasha area, the wind power projects in Turkana County, new city projects at Konza and Tatu and many others within the LAPSSET corridor.
This is why this VAT Bill needs to be interrogated urgently and throughly before it is brought to the floor of Parliament.
In conclusion, let us remove VAT from all major investment enterprises and let us do it from the beginning, not just when they come on stream. That way we shall be able to compete with the likes of the DRC and South Sudan.
The writer is a lecturer and consultant in Nairobi.
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