Cost Of Airline Tickets To Go Up As Govt Set To Abolish Tax Cuts

National Treasury Cabinet Secretary (CS) John Mbadi is proposing a 16 per cent value-added tax (VAT) imposition in the new Treasury tax review

Marvin Chege Marvin Chege
Nov 7, 2024 - 17:13
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Cost Of Airline Tickets To Go Up As Govt Set To Abolish Tax Cuts
Graphic of an aircraft in flight and a boarding pass. /PINTEREST.FREEPIX

Kenyans who have grown accustomed to air transport as a vital means of travel will have to dig deeper into their pockets as proposals contained in the Tax Laws (Amendment) Bill, 2024 are set to hit the country's aviation industry hard.

National Treasury Cabinet Secretary (CS) John Mbadi is proposing a 16 per cent value-added tax (VAT) imposition in the new Treasury tax review, a matter which will see air tickets, aircraft parts, and related services roped into the levy.

The introduction of 16 per cent VAT on air travel services which include air tickets, aircraft hire, leasing, and aircraft parts, is the government's latest bid to increase tax revenue while sparing everyday essentials in the country such as milk, bread, and maize flour after a proposal to slap VAT on them drew intense uproar nationwide.

Under the new rules, airlines will no longer be able to claim VAT refunds on inputs such as fuel, electricity, and raw materials, which had been allowed under the previous zero-rating system, a matter which will see higher costs imposed on airlines. These costs are likely to be passed on to consumers, leading to an increase in airline ticket prices.

Treasury Cabinet Secretary, John Mbadi at his office on August 12, 2024. /NATIONAL TREASURY

“We are not interested in making the Kenyan economy uncompetitive,” Mbadi said, adding that the changes would not burden the average consumer, adding “If there is any provision that you think would affect business, please give us a shout. We are at a level where we can still remove that.”

Why This Matters

Whereas this proposal could be a win for ordinary Kenyans purchasing everyday goods, this could hurt others in terms of air travel, particularly domestic, as they could be forced to seek alternative means of inter-county transport, should the proposal materialise.

For years, air transport was largely viewed as a luxury for many, especially in Africa, but rapid advancements in the aviation sector have made it a slightly affordable, safer and quicker means of transport, thus boosting its popularity amongst the general populace and leading to a growth in Kenya's aviation industry, something this proposal is threatening to reverse.

The proposal is also a change of tune from May 2023 when the Finance Act 2023 had proposed tax exemptions on helicopters and aircraft as well as their parts, sparing them from 16 per cent VAT and allowing more wealthy Kenyans to import them at cheaper prices.

Aviation lobbyists had previously warned that imposing the VAT on imported aircraft and drones could leave Kenya's regional aviation competitiveness vulnerable to being extinguished by its neighbours, with the Association of Air Operators (KAAO) and the African Airlines Association (AFRAA) warning that the proposed imposition will spell doom for the local aviation industry.

Mbuvi Ngunze, the KAAO chairman, told the National Assembly’s Committee on Finance and National Planning that the proposal which was contained in the Finance Bill 2024 would for example, result in a $576,000 (Ksh74,928,591.49) increase in the cost of a Cessna 208 Caravan plane and a $140,800(Ksh18,322,569.97) in engine overhaul for Bombardier Dash 8-200 plane.

The deleted Finance Bill 2024 sought to introduce the VAT on the importation of aircraft and spacecraft, direction-finding compasses, instruments, and appliances for aircraft as well as VAT on hiring, leasing, and chartering of fixed-wing aircraft, helicopters, UAVs, and balloons.

It currently costs $3,600,000 (Ksh468,809,110.30) to import a Cessna 208 and $880,000 (Ksh114,628,316.66) to import a Bombardier Dash 8-200 engine for overhaul, respectively. With VAT it will cost $4,176,000 (Ksh544,136,129.41) to import a Cessna 208 and engine overhaul to $1,020,800(Ksh133,020,073.91) to ship in Dash 8-200 engine.

Ngunze also cautioned that introducing taxes will make Kenya uncompetitive regionally and within Africa. He mentioned that in Tanzania, the importation of aircraft, aircraft engines, or parts is VAT exempt, while Uganda has zero-rated indefinitely on leased aircraft, aircraft engines, spare parts for aircraft, aircraft maintenance equipment, and repair services.

In Rwanda, Ngunze disclosed that aircraft, spare parts, and maintenance tools are VAT-exempt while Nigeria, Angola, and Mozambique have zero-rated imports of commercial aircraft, aircraft, and parts. Malawi has exempted the importation of aircraft and spacecraft from VAT.

“Introducing VAT on importation of helicopters and spacecraft under Chapter 88 of the VAT Act will result in Kenyan operators losing their competitiveness due to increased cost of purchase, leasing or financing of these equipment,” Ngunze elaborated, adding “This, in turn, will result in increased operational costs which will be cascaded down to the customers and travelling public.”

Ngunze told the committee chaired by Molo MP Kuria Kimani that increased costs will also discourage investors from registering aircraft in the Kenyan registry hence impacting revenue generated by the Kenya Airports Authority (KAA) in the forms of fees and levies. According to KAAO and AFRAA, the introduction of 16 per cent VAT will precipitate a significant surge in acquisition costs for airlines and operators which will impede fleet modernization and expansion.

“This will also make Kenya uncompetitive to investors due to the huge costs of acquisition thereby losing out on the international arena since investors will opt for countries that have less tax implications,” Ngunze argued.

He also added that imposing VAT on direction-finding compasses, instruments, and appliances will translate to higher costs for aircraft maintenance which has safety implications, a matter that will hurt local aircraft maintenance organisations since it will be cheaper to outsource maintenance activities in other countries within the region resulting in a loss of jobs.

Aerial view of the Jomo Kenyatta International Airport (JKIA) in Nairobi. /FILE

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