How transporters can navigate this year’s tough VAT landscape

Thika Road in a picture taken on December 28, 2022. PHOTO | SILA KIPLAGAT | NMG

The Finance Act has sent ripples of concern through the Kenyan transport and logistics sector. The increase of the value-added tax (VAT) rate on petroleum products from eight percent to 16 percent has sparked fears of significant challenges for industry players.

Some of the impacts of the change are assessed below.

Increased Operational Costs: The rise in VAT on petroleum products directly affects fuel prices, which are a major cost component for transport companies.

This increase will significantly raise the operational expenses of logistics firms, leading to reduced profitability.

Higher Consumer Prices: As transport costs increase, the ripple effect will be felt throughout the supply chain, ultimately leading to higher prices for goods and services.

Higher prices impact purchasing power and the overall demand for transportation services.

Competitiveness and Market Share: The VAT changes may erode the competitive edge of Kenyan transporters against their regional counterparts who face lower taxes.

This could result in a loss of market share for Kenyan businesses, hampering their growth and economic contribution.

Disruption to Supply Chains: The transport sector is the lifeline of the economy, facilitating the movement of goods and raw materials.

The increased costs may disrupt supply chains, leading to delays, inventory management challenges, and logistical bottlenecks.

For mitigation, the following strategies may apply.

Fuel Efficiency and Fleet Optimization: Transport firms should invest in fuel-efficient vehicles and optimise fleet management practices.

Regular vehicle maintenance, route optimisation, and driver training programmes can help reduce fuel consumption and improve operational efficiency.

Collaboration and Consolidation: Players can explore collaborations such as sharing transportation resources or forming partnerships to optimise logistics operations.

Consolidating shipments and sharing warehouses can help reduce transportation costs and increase economies of scale.

Diversification and Innovation: Transporters should consider diversifying service offerings to capitalise on emerging opportunities.

Exploring alternative energy sources, such as electric vehicles or biofuels, can mitigate the impact of rising fuel costs and promote sustainability.

Advocacy and Engagement: Associations and transport stakeholders should engage policymakers to highlight the potential adverse effects of VAT changes on the sector.

Advocacy efforts can contribute to policy reforms, exemptions, or incentives that alleviate the burden on transport and logistics companies.

Technology Adoption: Embracing digital solutions and advanced technologies can enhance operational efficiency, reduce costs, and optimise resource allocation.

Implementing transport management systems, real-time tracking, and data analytics can streamline processes, improve route planning, and cut fuel consumption.

The writer is a logistics and marketing consultant; [email protected]