In the Kenya Association of Travel Agents‘ estimation, the imposition of VAT on air ticketing services will reduce flight bookings by up to 15%, lead to business closures and with it approximately 12,500 in direct job losses, aggravating the country’s unemployment crisis.
Under the economic doctrine of price elasticity, higher prices of goods or services reduce demand.
In the air travel sector, this has come to bear in various jurisdictions globally where an increase in ticket prices through taxation suppressed bookings as customers travelled to cheaper destinations or cancelled their plans altogether. Additionally, higher ticket costs led to a reduction in flight routes, job losses, and missed revenue targets by governments following the negative impact on employment-derived taxes and the broader economy, including the tourism sector.
This detrimental impact of higher taxes on air ticketing services offered by travel agents was variously experienced in India, Malaysia and the United Kingdom, among other countries. Closer home, similar tax adjustments in South Africa, Tanzania and Rwanda adversely affected the travel value chain in recent years.
More specifically, a move to impose an 18% value added tax (VAT) on air ticketing services in Tanzania increased costs by 14.4% and reduced bookings by 13% in just one and a half years. Kenya, a strategically positioned leisure and business destination, benefitted immensely from our competitors’ miscalculations.
The Tax Laws (Amendment) Bill, 2024 proposal to introduce a 16% VAT on travel agent services is ill-timed and perilous, risking to roll back these gains to the benefit of our competitors. Air ticketing has enjoyed tax exempt status under the VAT Act, 2013 for a decade. As a consumption tax, the immediate impact will be price hikes as travel agents pass on the charges to consumers.
In our estimation, imposition of VAT on air ticketing services will reduce flight bookings by up to 15%, lead to business closures and with it approximately 12,500 in direct job losses, aggravating the country’s unemployment crisis. Direct aviation revenue is expected to reduce by 40% to $960 Million while corporation tax earned from this sector will reduce by a third to Sh. 4 Billion.
Annual payroll tax will dip by a similar quotient while consumption tax loss will be up to Ksh. 3 Billion annually. Given the fact that a majority of ticket requests originate from outside Nairobi, Kenya risks losing billions in dollars inflows. In sum, the Government stands to lose up to Ksh. 11 Billion annually in revenue streams; the short-term gain of this tax proposal will be negated by its long-term negative impact on the economy.
Another injurious aspect of the proposal is that it will disproportionally impact domestically-registered travel agents with physical enterprises, most of whom are SMEs. This is because online-based agents, as well as airlines, are not required to register or levy the tax, thereby handing them an unfair competitive edge. A Ministry of Tourism report indicated that 98% of the 1.5 million visitors who visited Kenya in 2022 purchased their air tickets from international agents. The proposed legislation will squeeze the fight out of the 2%, who operate on razor-thin margins.
More broadly, the tax proposal will negatively impact the tourism industry which is on a bounce-back, earning the country Ksh. 142.5 billion in the first half of 2024, a 21.3% year-on-year improvement. Apart from the proposed tax on air ticketing services, the Bill also intends to slap an equally egregious 16% VAT on, among others, national park and reserves fees, various tour operator charges, hiring and leasing of helicopters, and specially designed locally-assembled vehicles for tourist transportation. The painting on the wall is uninspiring.
The current international best practice is that handling of international air travel is an export service that should be zero-rated for VAT, in compliance with be global benchmarks like the Chicago Convention.
Similarly, air international travel is zero-rated in most jurisdictions. The same standard should be applied to local agents facilitating international connectivity. Many economic blocs in Africa have adopted preferential taxes and fees for travel, like zero-rating air ticketing services, in order to reduce of the cost of travel within member states.
The intention to move Kenya in the opposite direction should be dropped and replaced with proposals that incentivize growth of the travel and tourism sectors. Let us carefully balance the country’s revenue-raising needs with unintended socioeconomic outcomes of policy decisions.
Nicanor Sabula is the Chief Executive Officer, Kenya Association of Travel Agents
The views expressed here are the author’s own and do not necessarily reflect the editorial stance of The Kenyan Wall Street.