The Treasury has removed value added tax (VAT) on the importation of all aircraft spare parts, a waiver that will see cash-strapped Kenya Airways free up hundreds of millions of shillings normally locked up in duty refunds from the taxman.
The Finance Bill, which was published a week ago, amended the 2013 VAT law which only exempted aircraft operators from paying the 16 per cent levy on some of about 400 types of spare parts.
This left aircraft operators such as the national carrier paying hefty taxes to ship in critical parts to maintain their fleet.
While firms claim this tax from the Kenya Revenue Authority (KRA), longstanding inefficiencies in the process have seen the taxman amass billions of shillings owed to businesses like KQ, hurting their cash flow position and operations.
“Any other aircraft spare parts imported by aircraft operators or persons engaged in the business of aircraft maintenance upon recommendation by the competent authority responsible for civil aviation,” the new amendment states.
The taxman, in an internal circular to its staff, explained that this clause is “meant to cover all (aircraft) spare parts not specifically covered in the VAT Act 2013, adding that the change came into effect on April 3.”
KQ, which has posted losses for four consecutive years, has been lobbying to have all spare parts declared VAT exempt, noting that the tax and subsequent refunds were derailing its turnaround bid.
In just seven months after the tax was introduced in September 2013, the national carrier paid Sh700 million for imported spare parts, highlighting the burden of the levy.
Encompassing all spare parts under the exempt bracket will now give the airline more room to breathe even as it finalises restructuring its balance sheet ahead of a Sh60 billion recapitalisation of the company. As at September 2016, KQ had Sh116.7 billion in long-term borrowings and another Sh29 billion in short-term debt.
The airline is currently talking to its creditors to relax the repayment terms of these loans.