There is a big likelihood that there will be major disruptions in the Kenyan construction sector if the amendments to the First Schedule of the Excise Duty are enacted as currently proposed.
The proposed law increases the excise duty on imported construction finishing products to 35%. Amongst the key imports targeted are tiles and ceramics such as kitchen sinks, water closets, wash hand basins, urinals, etc.
According to a recent report by the nation media group, the cost of 1kg of imported tiles is likely to increase by Ksh.300 and Ksh.100 for every kilogram of ceramics shipped into the country.
This tax increase move also reflects a shift to a protectionist policy by the Kenyan government in a bid to promote locally manufactured products.
This will likely be good news to local manufacturers and suppliers but very bad news for the various construction players such as developers, potential home owners, contractors and constructional professionals.
The proposed law is a potential game-changer for entire Kenyan economy and here is why;
Increased construction material costs
The direct impact will be additional costs for imported finishing materials as firms will have to contend with paying the additional excise duty. This might be further complicated by the limited availability of local alternatives to supply the entire market.
Inflation of housing prices
As the cost of materials increases, developers are likely to roll over the higher costs to the end user whom in this case is the potential home buyer or tax payers for government projects. By extension, the cost of owning a house is likely to increase dramatically.
Impact on Unemployment
Reduced profit margins are likely to push construction companies to reduce the number of workers in a bid to tame costs and also to adjust to the low number of new and ongoing projects.
Existing employees in such entities are likely to be overburdened with more workload to cover the workforce gaps and thus leading to low work morale and by extension, low job satisfaction.
Delayed Projects
The number of stalled projects is likely to increase especially those whose budget had been planned for prior to the new tax laws.
Potential shift towards substandard goods
As construction firms seek for cheaper local alternatives so as to work within their client’s budget, they are likely to go for substandard products whose quality might not match some of the better imported products.
This might turn out to be more expensive in the long run especially in the maintenance aspect.
Possibility of Tax Evasion or Smuggling
Higher excise duties might incentivize smuggling or the use of illegal channels for importing construction materials to bypass taxes.
However, some of the likely positive implications are;
Increased Government revenue
As companies pay more duty for imported goods, the government will collect more revenue for use on other development programs highlighted in UDA’s Bottom Up Economic Transformation (BETA) agenda.
Innovation
In the long run, construction firms are likely to look for more affordable construction methodologies, alternative materials, and efficient practices in a bid to reduce their projects running costs.
Shift to local suppliers
More firms are likely to outsource their materials from local producers as the imported goods will become more expensive. Consequently, local suppliers are expected to expand in terms of the operational capacity and thus create more job opportunities.
This is likely to reduce the youth unemployment by a substantial margin which is one of the key government agendas.
In conclusion,
Overall, the increased excise duty on construction is likely to have both positive and negative implications on the overall Kenyan economy.
In the immediate aftermath of the adoption of the new excise duty, the construction players ought to buckle up for massive disruptions especially in the costs of current ongoing projects
However, in the long run, we are likely to reap some benefits especially in promoting the local manufacturing sector and reduction of youth unemployment.