Firms warn of costlier drugs if tax refund cut

Kenya Association of Manufacturers (KAM) chief executive Phyllis Wakiaga. FILE PHOTO | NMG 

By JAMES KARIUKI

More by this Author

Summary

• Drugs manufacturers say proposed change of their zero-rated to exempt status will force them to pay unrecoverable taxes for imported raw materials.
• Currently, the local firms or their commodities fall under zero rate of VAT status and enjoy input VAT refunds.
• The proposed exemption will, however do away with the benefit, making all local costs part of the manufacturing cost.

Medicines manufacturers say there will be a price rise and loss of jobs if the government denies them input tax refunds.

In a letter sent to Treasury Cabinet Secretary Henry Rotich, the manufacturers said the proposed change of their zero-rated to exempt status will force them to pay unrecoverable taxes for imported raw materials.

“The execution of the ‘exempt VAT’ discourages local medicine makers in favour of imports that account for 70 per cent of drugs consumed in Kenya. It makes local production uncompetitive and costly putting at risk 4,500 direct jobs and 15,000 indirect jobs in the sector,” they said in a statement issued by the Kenya Association of Manufacturers (KAM).

Currently, the local firms or their commodities fall under zero rate of VAT status and enjoy input VAT refunds. The proposed exemption will, however do away with the benefit, making all local costs part of the manufacturing cost.

“With a view of driving the Big Four Agenda, grow jobs, attract investors, increase capacity utilisation, substitute imports through local production, KAM proposes that pharmaceutical sector continues to operate under zero rate VAT,” said KAM chief executive Phyllis Wakiaga.

READ: Drugs firm to spend Sh3bn on Nairobi plant expansion

If implemented, manufacturers who sell medicines across Kenya and export to about 16 markets in East West and southern Africa risk losing the market as their products will be costlier than imported drugs.

KAM said the new Tax Amendment Bill 2018 was against President Uhuru Kenyatta’s Big 4 Agenda pledge to introduce incentives that spur manufacturing, enabling the sector to contribute 15 per cent to the national output against the current nine per cent within the next five years.

The Big 4 agenda focuses on food security, healthcare, manufacturing and housing in a bid to improve livelihoods across Kenya.

“It makes it more convenient to import drugs as the manufacturing sector will not be refunded VAT costs spent on local inputs. Where production will happen, the manufacturers will resort to higher and un-competitive pricing to recover the input tax,” said Ms Wakiaga.

“Under a zero rate regime, it costs Sh400 to produce a product but the same would cost Sh464 under the exempt VAT status,” she added.