The National Treasury has defended a decision that allows investors willing to set up companies worth more than Sh10 billion to claim tax rebates.
Treasury Principal Secretary Chris Kiptoo told Parliament that the Finance Act, 2018, allows the government to grant investors tax exemptions under the Special Operating Framework Agreement (SOFA).
Musa Kathanje, who represented Dr Kiptoo, told the National Assembly Committee on Delegated Legislation that the government amended the Value Added Tax, Income Tax Act, Miscellaneous Fees and Levies Act, and Excise Duty Act through the Finance Act, 2018 to provide for tax incentives to firms that enter into SOFA with the government.
The Treasury official appeared before the committee to respond to a petition seeking to know the circumstances under which it granted tax exemptions to firms under SOFA.
“Under the Finance Act, 2018, the government provided an enabling provision to enter SOFA with investors to support the manufacturing sector, to create employment and improve the technology transfer into the country, converting unskilled workers to semi-skilled and semi-skilled to skilled,” Dr Kiptoo said. “The provision was broad and not specific to any sector and therefore any manufacturer is free to apply.”
The PS told MPs that the Income Tax Act was amended to allow the government, under SOFA, to grant companies a rate of corporate tax that is different from the general one.
Dr Kiptoo said the VAT Act, 2013 was changed to provide VAT exemption on the goods and services imported or purchased locally for use in the implementation of projects under the SOFA.
He also explained that Parliament amended the Second Schedule of the Excise Duty Act to provide for the exemption of duty while the Miscellaneous Fees and Levies Act, 2016 was changed to allow for waiver of Import Declaration Fee and Railway Development Levy on goods imported for implementation of projects under the SOFA.
The PS told MPs that VAT exemption only applies to inputs and not to other goods imported by a company or sales of manufactured goods.
He said SOFA agreements are designed to stimulate industrial growth by addressing the specific needs of the manufacturing sector.
“There are two other SOFA arrangements namely, Positivo and Moderna human vaccine manufacturing companies. Moderna has not commenced the operation in Kenya,” he said.
Dr Kiptoo told the committee chaired by Ainabkoi MP Samuel Chepkonga that Blue Nile Rolling Mills took advantage of tax law amendments in 2018 and entered into SOFA with the government to support investment and expansion of the steel industry.
He said the agreement was signed by the Ministry of Industry, Trade and Cooperatives, Treasury and Blue Nile Rollings Mills on January 16, 2020. According to the PS, the agreement provides various tax incentives such as VAT exemption, as well as Railway Development Levy and Import Declaration Fee exemption on inputs used for the manufacture of G1 wire.
He added that it provides for lower corporate tax at 10 per cent for the first five years from the date of signing the agreement.
“In the agreement, the government committed to provide the necessary incentives to facilitate the company to manufacture galvanized wire,” Dr Kiptoo said. “It should be noted that Blue Nile Rolling Mills, before setting up the galvanised iron wire manufacturing project with an expected capital outlay of over $19 million in phase one, applied for tax incentives to be provided under SOFA.”
He explained that the Attorney-General cleared the SOFA deal with Blue Nile Rolling Mills after Kenya imposed a 17.5 per cent Export Promotion Levy through the Finance Act, 2023.
Dr Kiptoo said the company is the first of its kind in the manufacturing sector to be set up in Kenya, with technology transfer from India and China. He said that before the company was set up, Kenya used to import galvanised wire used for the production of nails, fencing wire, gabions and razor wire, among others, from China, India, Egypt, South Africa and other countries.
The committee directed Dr Kiptoo to provide additional documents on the legal backing of the SOFA and appear before it next week.
