Key imports face instant tax demands

Importers of a wide range of consumer goods – including food, used cars, alcohol, clothing and office supplies – will from August 12 be required to pay taxes immediately their cargo enters the country.

The Kenya Revenue Authority (KRA) has issued a notice that will eliminate use of bonded warehouses for these goods, meaning the benefits of delayed payments of taxes and stock management will soon disappear.

Analysts have warned that the drastic measure, aimed at sealing revenue loopholes and fast-tracking revenue collection, will have the unintended consequence of disrupting supply chains and hurting Kenya’s standing as a regional investment hub.

Only local manufacturers and new motor vehicle dealers such as East African Breweries Limited #ticker:EABL, BAT Kenya #ticker:BAT and Toyota Kenya have been spared from the policy change.

“The Commissioner of Customs and Border Control notifies the public that at the expiry of 90 days from the date of this notice, the following goods shall not be warehoused,” Pamela Ahago, who holds the office at KRA, said in a notice published in the Kenya Gazette dated May 13, 2020.

The directive is based on powers granted under Regulation 64(k) of the East African Community Customs Management Act Regulations, 2010.

Bonded warehouses are facilities licensed by the Commissioner of Customs for the storage of dutiable goods on which import duty has not been paid.

Importers use them when they do not have enough funds to clear their consignments immediately they arrive. Duty is paid when the goods are removed from the warehouse. Importers also pay storage charges to the government or private owners of the warehouses in Nairobi and Mombasa.

Small businesses, which suffer the most from constrained working capital, are likely to take the biggest hit from the changes.

Analysts say multinationals could also review their use of Kenya as a hub to serve their regional operations.

“The above restrictions are likely to have the undesired effect of making the country uncompetitive and less attractive to investors; and is counterproductive to the government’s agenda of developing infrastructure to make Kenya a global and regional logistics hub,” business advisory firm PricewaterhouseCoopers (PwC) said in a review of the policy change.

“Understandably, Customs is tasked with curbing illegitimate trade. However, in its efforts to ensure the proper enforcement of Customs laws and regulations, it must continually strive to facilitate legitimate trade.”

PwC said there would be immediate as well as long-term implications of the directive, with several unanswered questions that require further clarification. These include the treatment of importers of the banned products whose cargo is currently stored in the bonded warehouses but who will be required to pay duties effective August 12, 2020.

“What will happen to businesses that currently use Kenya as a regional hub, will they be allowed to warehouse goods destined for the regional export market?” PwC posed.

According to the advisory firm, the decision will deny businesses the opportunity to use the bonded warehouses for cash flow and stock management and for export planning.

“We recommend that businesses further analyse the impact as well as the practical aspects of the new rules, with particular consideration to potential supply chain restructuring,” PwC said.