Kenya will lose regional aviation competitiveness to its neighbors if Treasury’s proposal to impose value-added tax (VAT) on imported aircraft and drones is approved by Parliament, aviation lobbyists say.
The Association of Air Operators (KAAO) and the African Airlines Association (AFRAA) said the imposition of 16 percent VAT would be doom for the local aviation industry.
The association told the National Assembly’s Finance and National Planning Committee that the Finance Bill 2024, which seeks to remove tax exemptions for the aviation sector, will expand into new areas like Unmanned Aerial Vehicles (UAVs).
Mbuvi Ngunze, chairman of KAAO, said Mbuvi Ngunze.
“Policymakers must realize the multifaceted implications of these actions and prioritize strategies to maintain these critical exemptions in line with the International Civil Aviation Organization (ICAO) and the East African Common External Market Tariff on zero taxation on aviation.”
Mr. Ngunze told the committee that the effect of imposing VAT on aircraft imports would, for example, result in a $576,000 (Sh74,928,591.49) increase in the cost of Cessna 208 Caravan aircraft and $140,800 (Sh18,322,569) in engine overhaul. for Bombardier Dash 8-200 aircraft.
The Finance Bill 2024 seeks to reverse the tax exemption granted to the aviation sector in the Finance Bill, 2023.
The Treasury is seeking to introduce a 16 percent VAT on imports of aircraft and spacecraft, compasses, instruments, and aircraft equipment.
The bill also seeks to impose a 16 percent VAT on the hire, lease, and rental of fixed-wing aircraft, helicopters, UAVs, and balloons.
Mr. Ngunze told the committee that the effect of imposing 16 percent VAT on aircraft imports will, for example, result in $576,000 (Sh74,928,591.49) increase in the cost of Cessna 208 Caravan aircraft and $140,800(Sh18,322.56). engine overhaul for Bombardier Dash 8-200 aircraft.
It currently costs $3,600,000 (Sh468,809,110.30) to import a Cesna 208 and $880,000 (Sh114,628,316.66) to import a Bombardier Dash 8-200 engine for overhaul. With VAT it will cost $4,176,000(Sh544,136,129.41) to import a Cesna 208 and overhaul the engine to $1,020,800(Sh133,020,073.91) to ship in Dash 8-200 engines.
He said that the tax regimes in Tanzania, Uganda, Rwanda, Nigeria, Angola, Mozambique, and Malawi enjoy different incentives in line with ICAO and the East African Common External Market Tariff of zero tax on flights aimed at developing the industry.
Mr Ngunze said introducing the tax would make Kenya uncompetitive regionally and in Africa. He said in Tanzania, the import of aircraft, aircraft engines, or parts is exempt from VAT, while Uganda has unlimited zero-rating for leased aircraft, aircraft engines, spare parts for aircraft, aircraft maintenance equipment, and repair services.
In Rwanda, Mr. Ngunze said aircraft, spare parts and maintenance tools are exempt from VAT while in Nigeria, Angola and Mozambique they have zero value imports of commercial aircraft, aircraft and spare parts. Malawi has exempted imports of aircraft and spacecraft from VAT.
āIntroducing VAT on the importation of helicopters and spacecraft under Chapter 88 of the VAT Act will result in Kenyan operators losing competitiveness due to increased costs of purchasing, leasing or financing the equipment,ā Mr Ngunze said.
“This, in turn, will increase operational costs that will be passed on to customers and the traveling public.”
Mr. Ngunze told the committee chaired by MP Molo Kuria Kimani that the increased fees will also discourage investors from registering aircraft in the Kenyan registry, thereby affecting the revenue generated by the Kenya Airports Authority (KAA) in the form of fees and levies.
KAAO and AFRAA’s introduction of 16 percent VAT will lead to a significant increase in acquisition costs for airlines and operators that will hinder fleet modernization and expansion.
“This will also make Kenya uncompetitive for investors because of the huge cost of acquisition thus missing out in the international arena since investors will choose for countries that have less tax implications,” Mr. Ngunze said.
“This will also lead to an escalation in air travel and charter services, cargo services, aerial services, Unmanned Aerial Vehicle (UAV) services, balloon operations, aircraft repairs, and training prices, thus hindering the growth trajectory of the sector to maintain and develop air transport Kenya system.ā
He said that VAT on compasses, instruments and direction-finding equipment would mean higher costs for aircraft maintenance which has safety implications costs would be very high.
He said this would harm local aircraft maintenance organizations as it would be cheaper to outsource maintenance activities to other countries in the region resulting in job losses.
“The introduction of VAT on renting, leasing and leasing aircraft poses a significant risk of increasing operational costs.”
