Pain as VAT pushes up cost of construction materials

Property developers have decried escalated costs of construction in Kenya following last year’s introduction of value-added tax on building and construction materials.

The Kenya VAT Act 2013, which came into force on September 2013, brought about a new construction materials pricing regime that saw the cost of key building materials rise drastically – setting the construction sector on an inflationary path.

On top of that, county governments have in the past six months introduced exorbitant levies on builders in their respective counties, further pushing up building costs in Kenya.

Nairobi County has, for example, hiked its construction permit fee by a multiple of between 200 and 1,250, from 0.001 to 0.006 per cent of the cost of construction to 1.25 per cent.

This has seen city developers going slow on their construction activities – a trend that is now beginning to worry policy makers.

READ: Nairobi builders hit hard by exorbitant levies

Philip Kiama, a property developer in Nairobi, says Kenya has made strides in property development, particularly in residential housing and the new levies would only scare away prospective investors.

“The new levies that came in the wake of hard economic times occasioned by the VAT law that came into effect last year are very unfortunate….Investors are now pulling out of projects,” he said.

In January this year, cement makers increased retail prices by at least Sh20 per 50kg-bag in response to the government’s move to impose a Sh140 tax per tonne of cement – which translates to about Sh7 per bag.

“Construction costs have been pushed up to crazy levels. It does not make economic sense any more to build homes for sale, especially considering the high interest rates on credit,” said Patrick Mbote, whose construction project in Nairobi West has stalled.

The highly priced building materials and exorbitant levies pose a risk of slowing down activity in the construction industry that has grown exponentially in the past decade fuelled by a swelling middle-class with disposable income.

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