In his budget speech on June 8, Treasury Secretary Henry Rotich said the government would reduce corporate tax by 10 per cent for developers who construct 1,000 or more low cost homes per year.
This, he said, would help bridge the wide gap between demand for houses (200,000 units a year) and the actual supply (about 50,000 units annually) while ensuring decent low-cost housing.
Stakeholders in the construction sector felt the 1,000-unit threshold for the tax incentive was quite unrealistic considering the high costs involved in putting up developments of such magnitude.
This, as well as calls, from other stakeholders convinced the government to lower the target to 400 low cost houses while raising the corporate tax cut rate to 15 per cent.
While this is commendable, we need to consider several issues.
A significant number of developers in Kenya have for many years shunned the lower segment of the market due to what they term as ‘extremely’ small profit margins.
Currently, most of the housing stock is in the middle and upper segments of the market that promise higher returns.
It is also worth noting that corporate tax is only charged on the developer’s net profit, and, depending on the profit percentage, this could be negligible.
In any case, corporate tax incentive is misplaced since the benefits accrued under the deal cannot be passed on to home-owners.
Besides, a developer can never be sure of the proceeds from the next project for him to consider giving discounted prices based on the previous project’s tax rebates.
We therefore appeal to President Uhuru Kenyatta’s government to consider going back to the drawing board and come up with a more workable incentive that will make developers pass on the benefits to the home-buyers.
We believe that the government can actually lure investors by providing infrastructure such as roads, water and sewer lines that take up close to 25 per cent of costs.
These huge cost savings are actually enough motivation for investors to enter the low cost housing market segment.
The State should also allow developers to claim back the value added tax (VAT) charged on building materials and perhaps pass such benefits to the end user.
This is likely to bring down the cost of housing by a huge percentage while boosting homes supply.
In addition to that, the government should do facilitation for the construction industry, whereby it negotiates with banks to get developers the financing they need to build with low interest rates.
This would help to ease the high cost of financing, which has been the main impediment to the local construction sector.
If this fails, the State should offer some tangible incentives to financiers so that they can lower the cost of funding and perhaps bring interest rates to a single digit.
This is what will help developers to deliver truly affordable housing.