Can the Tourism Sector Catch a Tax Break?
The creation of a stand- alone Tourism Ministry and the appointment of a new Cabinet Secretary for Tourism has injected a dose of optimism and excitement in the tourism sector, given the rise in international tourism.
According to the United Nations World Tourism Organisation (UNWTO), the international overnight visitor arrivals globally grew by 4 per cent in the first half of 2015. This development is linked to increased affluence in emerging economies and a growing middle class. With this expansion, tourism continues to play an important role in many developing economies, including Kenya.
Until recently, the sector was one of Kenya’s leading foreign exchange earners. The upsurge in arrivals illustrates potential that is yet to be fully exploited. Recent initiatives indicate that the Government is alive to the immense contribution the sector can make to economic growth. However, despite all the marketing initiatives and promotions, there are two fundamental changes that need to be made in the sector:
- Security – undoubtedly, perception and trust are everything in the tourism sector. While insecurity is a challenge to every government in the world, Kenya has recently borne the brunt of this negative perception especially as a result of the source-market issued government travel warnings. The country’s image has been boosted by the lifting of some of these warnings and the hosting of the US President, the Pope and most recently the World Trade Conference. Needless to say, security enhancement is important in ensuring minimal negative impact to the country.
- Competitive pricing – both the Government and private sector have to ensure that the country’s tourism product remains competitive against other countries with similar offerings. Fundamentally, the Government must consider the impact of taxation on the sector because this is an important contributor to the price. The Value Added Tax (VAT) Act, 2013 slapped a 16 per cent rate on services offered by tour operators and hoteliers. This put a major strain on a sector already under pressure. Despite the marketing promotions, VAT imposes an additional 16 per cent cost to a tourist visiting Kenya. Economics dictate that most tourists will therefore opt for cheaper destinations. Although the overhaul of the VAT Act has helped the Government increase its revenue targets, the tax increases have had a negative impact on the tourism sector and its related support segments of society.
Tourism contributes to the economy directly through ‘internal’ spending by both residents and non-residents, leading to increased revenues through levies and fees among others. It also contributes indirectly through investment in the sector, increased private marketing and promotion, increased domestic purchases and, most essentially, increased job opportunities. These economic benefits and the multiplier effect need to be considered against the revenue collection targets expected from charging VAT for services and products from the sector. While Kenya remains a highly desirable destination for tourists, the current rate of VAT has affected its pricing model. A reduction in the VAT rate or its scrapping altogether for the sector, would bring significant benefits to thousands of hospitality and related businesses across the entire country.