The Kenyan treasury has agreed to pay tax for the Standard Gauge Railway project suppliers, after a taxation dispute erupted between major suppliers the Chinese contractors and the Kenya Revenue Authority (KRA). The first phase of the KES 327 billion Standard Gauge Railway (SGR) project is currently underway, linking Mombasa to Nairobi and is expected to be completed in 2017.

 

The second phase of the project will link Nairobi to Malaba and Kisumu, and the ultimate goal is to create an international network linking Uganda, Rwanda with a branch to Juba by 2020.

The completion of the railway will likely improve trade within the East African Community (EAC) as well as within Kenya. Kenya, Rwanda, Uganda and South Sudan have jointly undertaken this project in order to ease transport within the region and also provide a channel for oil fields in Uganda, northern Kenya and South Sudan.

Currently in Kenya most cargo transport is done by road which creates a lot of pressure on roads resulting in the constant wear and tear. The railway project will also significantly reduce transport costs as well as boost local economy. President Kenyatta has noted that the SGR project is the largest project to be undertaken in Kenya in the last 50 years. Despite Chinese Export-Import Bank commitment to finance 90 percent of the first phase of SGR, the project has experienced various delays and hiccups. The delays have occurred due to legal issues pertaining to tendering as well as compensation of government-expropriated land. The more recent delays include the VAT dispute between local suppliers and the government.

The disagreement arose as a result of the 16 percent VAT that local suppliers were asked to pay on their merchandise even though supplies to government are in most cases exempted from the levy. The new VAT act 2013 does not exempt them from providing tax on donor-funded projects. The dispute eventually led to suppliers halting services until the dispute was resolved. A subsequent meeting on February 4th was held between the government and registered suppliers which outlined a framework that would work to ensure that the project complied with country’s tax laws. 

As of now, the government has agreed to pay for all incurred VAT and other levies on all the construction materials for the project. Although the suppliers will be charging VAT to China Roads and Bridges Corporation (CRBC), the contractor will not be making payment of that VAT instead the National Treasury will make the payments. In addition the government has ensured that it will compensate the registered suppliers, with an unconfirmed amount of about KES 7 billion ($77m). The arrangement has been put forth in hope that the project execution will proceed smoothly.

There is further chance of delay as the CRBC has rejected certain categories of cement and steel produced by local Kenyan manufactures. CRBC claims that these products do not meet required specification. According to Patricia Kimathi, the Kebs corporate communications manager, in terms of key physical and chemical performance parameters, there is no significant difference between the Kenyan and Chinese cement standards. However, one cement, 52.5, is where the specifications differ. For Bamburi’s cement PowerMax , the product is classified as a CEM II/A-L 42.5 N Portland Limestone Cement. ARM’s Rhino cement, their specifications do not exceed 42.5. In measuring cement strength, China uses Strength grade of Portland cement, divided into 42.5, 42.5R, 52.5, 52.5R, 62.5 and 62.5R.

An agreement between the Kenyan government and the Chinese contractors states that 40 percent of all construction materials have to be procured from local manufacturers. The project has created many opportunities for local Kenyans; CRBC is expected to use a local workforce of about 30,000. In addition, CRBC has signed agreement with Kenyan cement companies for the provision of materials for the construction of the SGR. Some these suppliers (companies) include, ARM Cement and Bamburi Cement, Savannah Cement, East African Portland Cement and other local cement manufacturers. However, the recent concerns of quality and standards could affect not only the project but could also cause problems with local industries. Betty Maina Chief executive of KAM notes that meeting the standards set forth by CRBC is not a problem that companies just need time.

At least for now the issue of VAT seems to be taken care of, with the government’s move to waive tax on local supplies. Still, the suppliers are required to register with iTAX, KRA’s electronic tax declaration system in order to ensure that supplies for the SGR are not misused or diverted to other unrelated projects or into the open market.

Hopefully, there will be no more delays as the government as well as Kenyans are eager to see this project completed on time.

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