Employers still wary of tourism tax incentive

Local tourists are taken on a tour of the Fort Jesus National Museums. Domestic tourism is increasingly important to Kenya’s tourism sector as it faces poor performance in key source markets. FILE PHOTO / NATION MEDIA GROUP 

In Summary

• Domestic tourism is increasingly important to Kenya’s tourism sector as it faces poor performance in key source markets.
• Intra-regional tourism is expected to be boosted by legislative changes that make it possible for East Africans to cross borders without passports.

By MUTHOKI MUMO
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A government plan to absorb the cost of employees’ holidays to rev up numbers in the hospitality industry could come a cropper amid uncertainty over its implementation.

 

In his budget speech last Thursday, Treasury Secretary Henry Rotich vowed the government would grant tax deductions to companies that pay for their employees’ vacations within the country.

Mr Rotich, in pursuing the Sh2.4 billion plan, is echoing a pronouncement made by President Uhuru Kenyatta last month as one of a raft of measures meant to safeguard a sector that has been brought to its knees by security concerns.

The plan is to be effective over 12 months, and there is a need for urgency in implementation if it is to have maximum impact. Mr Rotich said the directive will be part of proposed amendments to the Income Tax Act and would be backdated to June 13 once passed.

However, it is unclear whether employers will be willing to jump on the bandwagon simply on Mr Rotich’s word. Although the plan has the political backing of the President, until Members of Parliament pass the Finance Bill 2014, it will not be law.

FINANCE BILL

“Most employers want a gazette notice before implementing this. In principle, it has been agreed on, but people do not want to take the risk,” said Kenya Tourism Federation chief executive, Ms Agatha Juma.

On the other hand, Deloitte Tax Partner Mr Nikhil Hira, said it should be safe for employers to implement the directive once the Finance Bill 2014 is published. Given the political support the proposal has, he said, it is unlikely that MPs could exclude it from the Act.

Although employers will get tax breaks, allowances provided to employees are still taxable under the Income Tax Act. Ms Juma said KTF is currently engaging the government on the possibility of waiving these particular taxes.

In its post-budget analysis, audit firm PwC notes that government is unlikely to provide a more detailed plan for implementation of the plan and that “employers may need to enact individual vacation policies.”

When President Uhuru Kenyatta first announced the plan in May, Federation of Kenyan Employers executive director Ms Jacqueline Mugo in a message to Sunday Nation, questioned whether the government would be able to provide tax refunds in good time.

DOMESTIC TOURISM

Currently, the Kenya Revenue Authority is holding Sh32 billion in Value Added Tax (VAT) refunds.

Domestic tourism is increasingly important to Kenya’s tourism sector as it faces poor performance in key source markets.

Last year, international arrivals to Kenya fell to 1.52 million from 1.71 million the previous year, according to the Economic Survey 2014. International arrivals have been on a negative trend since 2011.

At first, this was due to the eurozone economic crisis and was later compounded by election-related jitters and security concerns.

On the other hand, domestic tourism has been on the rise amid campaigns by the Kenya Tourism Board (KTB). Kenyans occupied 41 per cent of bed-nights in 2013, up from the 34 per cent they occupied in 2009.

In addition to trying to grow domestic tourism, Kenya is diversifying its tourism source markets by turning east to China.  But new source markets and increased domestic tourism cannot be a panacea for what ails the sector.

For one, Chinese tourists are also raising security concerns. Additionally, Ms Juma notes that Chinese tourists coming to Kenya may visit game parks but are not as equally enamoured of Kenya’s Indian Ocean beaches.

SPECTRE OF DANGER

In May, President Kenyatta formed a task force that will address the challenges in the tourism sector in the long term.

“The task force will address underlying challenges in order to position Kenya as a preferred destination for tourists. We are targeting five million tourists in the next five years,” said KTB managing director, Mr Muriithi Ndegwa, in a telephone interview with the Sunday Nation.

Following the elections last year, Mr Ndegwa says, tourism numbers in the country had begun to recover, until the Westgate Mall terror attack in September. A spate of attacks this year has meant that the spectre of danger is never far away for tourists coming to Kenya.

300 British tourists were last month evacuated by tour companies from Mombasa. On Friday, the British government closed its honorary consulate office in Mombasa. The country has advised its citizens against all but essential travel to Mombasa Island.

An aspect of security that touches more directly on the tourism industry in Kenya is poaching. Valued by poachers for their ivory tusks, Kenya’s elephant population fell by 2,500 last year, according to the Economic Survey, 2014. Mr Rotich proposed to address this by allocating Sh1.8 billion to the fight against poaching.

DILAPIDATED INSTRASTRUCTURE

Another fundamental challenge is the competitiveness of Kenya’s tourism product. According to the National Tourism Strategy 2013-2018, there is need to put money into dilapidated tourism infrastructure.

Taxation has also meant that Kenya’s safari product is a relatively more expensive destination in comparison with similar ecosystems in East Africa.

President Kenyatta tried to address this by scrapping value added tax (VAT) on air-ticketing services and reducing park fees. He also ordered KRA to fast-track tax refunds to the sector. Some players in the sector argue that this is not nearly enough.

“I was hoping that that he [Mr Rotich] would give a tax relief to tour operators for a certain period until the sector recovers,” said Mr Vincent Maingi, who runs outbound tour company Africa Viza Travel.

Kenya is currently marketing its tourism products jointly with Rwanda and Uganda. Given that the region is a long-haul destination for most international tourists, Mr Ndegwa argues, joint marketing combined with a single tourist visa is likely to draw even more international tourists to Kenya.

Intra-regional tourism is also expected to be boosted by legislative changes that make it possible for East Africans to cross borders without passports.