State questions private sector data as manufacturers push for tax cuts

The quality of data used to make decisions in the manufacturing sector has been put to question, even as manufacturers tabled their case before the government to remove taxes on inputs.

Investments, Trade and Industry Cabinet Secretary Lee Kinyanjui, while agreeing that the country’s tax regime is unfriendly to businesses, also questioned the quality of data presented to the government by the players in the private sector for decision making.

He said he understands the tradition where businesses operate several books that when an entity like a bank or the government asks for data, they present different books to either.

The CS, while speaking during the launch of the Manufacturing Priority Agenda 2025 by the Kenya Association of Manufacturers (KAM), noted that sometimes, the data presented to the government is not commensurate with what is going on in the industry.

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The data showed that jobs created in the manufacturing sector have increased to 362,300 in 2023 compared to 343,700 back in 2017.

Compensation of employees in the sector grew to Sh283.1 billion in 2023 from Sh258.4 billion in 2022. Manufacturing output has also increased by 13.1 per cent to Sh3.6 trillion in 2023 from Sh3.2 trillion in 2022.

“As much as the GDP contribution is going down, the value of manufacturing output is still increasing. It increased by 13.1 per cent, which is a double-digit and a good thing,” said KAM Head of Policy and Regulatory Advocacy Miriam Bomett.

Unlike in 2021 when manufacturing grew by 11.3 per cent, the sector expanded by 7.6 per cent in 2023.

The double-digit growth in 2021, explained Ms Bomett, is associated with the incentives introduced by the then administration.

“We were able to see the correlation between reduced taxes and the growth of the manufacturing sector contribution. We have statistics to show that any kind of tax incentive and support in the industry can lead to growth,” she said.

Bomett noted that the sector has the potential to raise Sh1 trillion for the government in taxes if it is offered the necessary stimulation.

According to data presented by KAM, manufacturers paid Sh230 billion in customs taxes in the 12 months ended January 2024

. “We are sure if we are to get to 20 per cent (manufacturing contribution to GDP) which is ambitious, we will be able to collect Sh1 trillion in taxes. We need to work backwards and come up with strategies,” she said.

One of these strategies is doing away with taxes on inputs, which she said is driving away industries. She said the appropriate way to tax manufactured goods is on the finished products.

She referenced this on the 25 per cent tax on finished imported furniture introduced in 2022.

As a result, production increased in the country by 5.5 per cent in 2023, as well as the value of exported furniture, which went up by 27 per cent.

“Revenue dips when you charge raw materials,” she said. However, for industries in agro-processing, data from the manufacturers show that levies on white sugar, which Ms Bomett said is not available locally, are driving industries away.

“In 2024, we saw an increase in excise duty on white refined sugar. One of the regulators (Agriculture and Food Authority) also increased the Sugar Development Levy. When you do the calculation at the end of the year, you have been taxed by the regulator, the government, through excise duty or value-added tax has been increased. Firms are unable to plan their investment or recoup their capital,” she said.

CS Kinyanjui, while acknowledging these challenges, and even proposing a tax regime that can serve businesses for four years, noted that the lack of credible data makes it hard for the government to make precise decisions.

He gave an example of the data related to cement production, saying official figures show that in the last four years, the numbers went down.

“But this is when our biggest skyscrapers have actually come up. Even the year when the Nairobi Expressway was built, which was the biggest consumption (of cement) you can imagine, on record, cement production dropped,” the CS pointed out.

He said the method by which the data is collected cannot guarantee accurate feedback. He said even as data shows manufacturing is going down, sometimes it is good to know which set of books the industry players are referring to.

“As a government, we want to make decisions based on credible data. No country can make progress without data,” he said.

“As policy makers, let us get credible data. With credible data, it’s very easy to deal with these issues.”

CS Kinyanjui said the government is cognisant of the unpredictable tax regime which changes yearly, unlike the long-term facilities offered to businesses by banks that can last for 10 years.

“When we say, for example, manufacturing is going down, how is this data gotten? We get it by asking someone, how many iron sheets did you produce?’ Yet we know many of us have a number of books. For the bank, we present this set of books, a different one for the Kenya Revenue Authority (KRA) and another one for the government. And when KAM wants to discuss tax policy, another set is presented,” said the CS.

“Even foreign investors are coming to me asking: What is your tax on this and that, and my answer is as true as the next four or 10 months. How does such a person come to invest?” he posed.

He said the country’s structure of planning is not necessarily informed by the best of choices. “Secondly, it is short-term, but investment is long-term. Until we adjust both sides, we are likely going to have these mismatches,” he said.