Effective Budget Implementation critical to jumpstarting the Manufacturing sector
By Phyllis Wakiaga
A sound national budget is one that supports other essential instruments of Government policy to turn ambitions and plans into reality. It catalyzes the quick delivery of targeted economic achievements to impact the country’s status both in the medium and long-term.
The 2019/20 budget has made noteworthy strides to support critical outlined policies to drive the economy through the 4 pillars. Specifically, the competitiveness of the manufacturing sector, as the fundamental pillar in driving national development, has received special focus with the domestic tax measures proposed.
Prolonged challenges that have plagued the sector over the years have been attributed to, among others, unfair competition from imports and the illicit economy, unpredictability in the policy and regulatory environment, low liquidity in the market affecting operations and therefore productivity as well as low uptake of local content in national projects. It is laudable that the government, through this budget, has made efforts to address these issues with the objective to spur industry productivity and achieve the intended 15% GDP contribution by 2022.
Proposed measures on VAT, for instance, the Export Refund Formula introduced in 2017 with the aim to determine the amount owed to a registered person who makes taxable supplies at both the general rate and zero rate, has been counterproductive as it essentially reduced the amount of refund rightly claimable by a person making zero-rated sales. In the end, the formula became punitive for manufacturers and dis-incentivized those especially in the exports business. By adjusting the formula to ensure exporters fully recover their VAT refunds, the government seeks to unlock working capital required for day-to-day operations by manufacturers, thereby enhancing liquidity in the market and boosting productivity. This positive effect will be supplemented by the reduction of the VAT Withholding Tax from 6% to 2%, as well as the proposed committee that will be constituted to clear the backlog in VAT refunds owed to manufacturers going back three years.
The issue of prompt payment was also given due prominence in this budget, and rightly so, because the issue of delayed payments has crippled many operations not only for manufacturers but also for other businesses in their value and supply chains. The hardest hit have been SMEs. Therefore the proposal to amend the Competition Authority Act to regulate payment matters and the measure to have all suppliers to Government paid within 60 days is a welcome relief for many and will have an immediate positive impact on the circulation of money in the economy.
The proposed budget has also prioritized the streamlining of local transport and logistics processes to reduce losses and additional costs incurred from storage and demurrage charges. Delays at the port and Inland Container Depot brought about significant costs implications for many manufacturers with the storage charges for some surpassing the cost of raw materials brought in for processing, for instance. However, the proposed amendments will reorganize the process of Pre-verification of Conformity, curbing losses whilst at the same time reinforcing the stringent measures against substandard imports and other forms of illicit trade.
Notably, the reduction of Import Declaration Fee (IDF) on raw materials and intermediate goods from 2% to 1.5% will improve the cost competitiveness of locally made products, against cheap finished imported goods. This is supplemented by the proposal to increase the same on finished goods from the current 2% to 3.5% as well as Railway Development Levy from 1.5% to 2%.
Other commendable proposals include the 30% Corporate Tax Power Rebate Programme whose framework has now been agreed upon and is set to considerably reduce power costs for manufacturers; the proposal for local content procurement preference which is a huge step in building local capacity and increasing job creation; measures to support the circular economy by incentivizing plastic recyclers and investment in that sector; and the support accorded to SMEs to enable them access credit and grow their portfolio through the stock exchange.
That said, it is vital to note that the effectiveness of a National Budget lies in its implementation. For it to be a meaningful policy document, it has to be applied through a coherent and coordinated framework that brings together all functions of Government for there to be tangible results that will visibly boost our economy. The same spirit has to be replicated in the County Government budgets so that the country is working on a shared vision to reach a common goal for the prosperity of our citizenry.
For this vision to be a reality we also need to be cognizant to instill budgetary governance to underline the process of funds disbursement, sealing any wastage and corruption loopholes, and in the long run, ensure that the aims of the measures proposed meet their objectives sustainably.
The Writer is the CEO of Kenya Association of Manufacturers and the UN Global Compact Representative for Kenya. She can be reached at [email protected].