Will VAT Increase Turn Kenya Into A Luxury Destination?

Will VAT Increase Turn Kenya Into A Luxury Destination?

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At a time when Kenya is desperately trying to uphold its reputation as an attractive and safe destination for travelers, the Kenyan government has dealt the tourism industry a heavy blow by raising the value-added tax (VAT) on its tourism products.

But most of the tour operators contacted by Travel Weekly aren’t pushing the panic button just yet.

In September, the government announced the new VAT Act 2013, which states that a number of previously exempt goods are no longer exempt from VAT, including game drives and conservancy and park fees. These services are now subject to a 16 percent VAT charge. Just weeks after the controversial VAT Act was published, the Mombasa county government announced it will demand a $5 bed tax from all hotels and resorts per month, as well as $40 tax on each tourist vehicle per month.

The Kenya Association of Tour Operators (KATO) is up in arms about the new rules, and has warned that the new law will lead to tens of thousands of cancellations. The group argues the lack of notice period did not allow the industry time to plan for the increase: the new VAT law was adopted on Sept. 2, just days after it announced. The association explains that the new VAT levies will put Kenya at a competitive disadvantage with its neighboring countries.

“There is also need for time to address the regional disparities whereby Tanzania and Uganda have suspended proposals to implement VAT on various aspects of tourism activity. Kenya therefore risks being seriously disadvantaged should the VAT proposals remain. ”

Calvin Cottar, owner of the luxury Cottar’s 1920s safari camp, explains it is a mistake to burden tourism players with more taxes as it will reduce investor confidence and discourage future direct foreign investment. He says: “Any reduction in tourism numbers will result in a reduction in the multiplier effect to the economy by the industry, in the end costing far more than could possibly be gained by such tax increases. I hope the government will rethink this strategy and instead reduce taxes.”

The increased VAT will have a particularly adverse effect on the lower-priced, mass-volume tours, according to Cottar. He explained it is unlikely that the top camps will feel the impact, as the top-end guest will not be concerned by the few dollars more per day.

“In fact, it may make some of our parks and reserves more palatable for higher-end tourists looking for ‘wilderness’ and ‘privacy,’” Cottar said. “There might be a silver lining in all this in that it may well be the tipping point for industry and government leaders in Kenya to change the countries destination branding to focus on high-end tourism.”

The Kenyan Tourism Board has also downplayed the effects of the increased charges. A Kenya Tourism Board U.S. representative told Travel Weekly: “While the additional charges are unfortunate, we do not foresee them having a significant impact on inbound tourism. Kenya still offers travelers several budget-friendly options across all areas of the country.

“Additionally, the VAT has not increased by 16 percent across the board, as many of the camps already charged a VAT tax and will only be increasing that tax closer to 8 percent instead, or even choosing to absorb this cost for clients.”

According to a spokesperson for AndBeyond, the impact will indeed be limited as the overall impact to the end consumer of the VAT increases is estimated at only around 5 percent to 8 percent of the total package, which is much in line with many competing destinations’ annual inflationary increases. He adds that at other competing destinations per diem rates are still significantly higher than Kenya’s. AndBeyond warns, however, that if further taxes are levied, there could be an erosion of the current competitiveness, which could impact the success of the destination in the medium- to long-term.

Kota Tabuchi, managing director, Africa for Travel Beyond, agrees that despite the increase in cost, Kenya is still competitive in the market place.

“We haven’t seen any impact and [I] doubt we will,” Tabuchi said. “Kenya offers premium product at attractive rates compared to their neighbors in Tanzania, which tends to be a slightly more expensive safari destination for high-end customers.”

Anil Ghei, director of tourism operations for the Madhvani Group, adds that the univisa, which is expected to be implemented on this coming New Year’s Day, will further enhance Kenya’s competitive edge.

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