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Tax measures as impetus to education sector

Government incentives on educational materials and services are meant to lead to higher literacy levels

BY APOLLO KARUMBA

According to Kenya Vision 2030, the country was expected to have achieved the Millennium Development Goals (MDGs) whose deadline was 2015 as it made progress to middle-income status through key development plans. One of the eight MDGs was the attainment of universal primary education. This was anchored under the social strategy of investing in the Kenyan people through education and training, where the blueprint document provides that Kenya should focus to provide globally competitive quality education, training and research to her citizens for development and enhanced individual well-being.

About the last five years, the Kenyan overall goal in terms of education was to reduce illiteracy by increasing access to education, improving the translation rate from primary to secondary. Other goals included the integration of all special needs education into learning and training institutions, achieving an 80 per cent adult literacy rate, increasing the school enrolment rate to 95 per cent and increasing the transition rate to technical institutions and universities from 3 to 8 per cent by the year 2012.

Tax incentives for education sector

From the previous Government regime, we have witnessed set up of public and private universities in almost every county with these universities being encouraged to expand their enrolment with emphasis on science and technology courses. While there have been developments from an infrastructure point of view, the Government has also strived to make fiscal policies geared towards attainment of the education goals as enshrined in Vision 2030.

To make education more affordable, the Income Tax Act (ITA) has provided incentives for education services. The ITA exempts from taxation of income of an institution established in Kenya solely for the advancement of education. This implies that income for school institutions in Kenya is not taxable from an income tax perspective.

Additionally, the ITA exempts training fee from withholding tax (WHT) where a payment is made for educational services provided by a pre-primary, primary, secondary, a technical college or university or where it is provided by an institution established for the promotion of adult education, vocational training or technical education. This is meant to encourage potential Kenyans to undertake education services across the whole spectrum from primary to university level which would lead to higher literacy levels. Additionally, these incentives are meant to encourage more investors to venture into education sector. 

Tax rebate for graduate apprenticeships

From an employee incentive perspective, the Minister for Finance through the Budget Statement for 2011/2012 said that the government would enter consultations with the private sector players on the best ways to extend tax breaks for firms offering internship and training placement for Kenyan youth. Later, the Cabinet Secretary for National Treasury published the Income Tax (Set-Off Tax Rebate for Graduate Apprenticeships) Regulations in 2016, which saw eligible employers deduct a tax rebate equal to fifty per cent of the amount of salaries and wages paid to at least ten apprentices.

The rebate is in addition to the corporate tax deduction where the total expense incurred is already allowed as a deductible expense for the expenditure incurred in salaries and wages. This is to encourage investors to offer job opportunities to qualifying students hence increasing their employability level. 

The VAT Act also provides that services rendered by educational institutions to their members are exempted from VAT if these services are not offered by way of business. Additionally, in 2017, the government, through The National Treasury, enacted changes to the VAT legislation to allow for the exemption of parts imported or purchased locally for the assembly of primary school laptop/tablets. Such policy initiatives are not only commendable but show the government’s commitment to supporting education, which is key to its vision for growth and development of Kenya’s future generation.

The East African Community Customs Management Act (EACCMA) also provides customs duty exemptions for instruments, apparatus and models, designed for demonstrational purposes for use in education. Additionally, the EACCMA provides for customs duty and VAT exemption on materials, articles and equipment that are specially designed for use by disabled or physically handicapped persons intended for the educational, scientific or cultural advancement of the disabled for the use of an organisation approved by the government.

Are tax incentives attractive enough?

Whilst it may appear as if zero-rating and exemption result to the same cost implications of a reduction in the price of goods and services, this is not the case. Where supplies are zero-rated, VAT essentially functions as a pass-through cost for the supplier and therefore does not result in an additional cost to be passed on to the final consumer. On the contrary, in the case of VAT exempt supplies, the supplier is not eligible to claim any input tax credits in relation to the VAT incurred in making of such supplies. Accordingly, all the unclaimable input tax is factored in the price charged to the final consumer. Typically, supplies become costlier as a result.

However, the question is whether these incentives are enough to attract investors into Kenya’s education sector. We should ask whether there are additional incentives that the government can consider for education investors, as well as those interested in acquiring education services such as zero-rating of books and other learning materials.

Apollo Karumba is a Tax Manager with Baker Tilly Merali’s CPA. Email: apollo.karumba@meraliscpa 

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