Effect of tax incentives on financial performance of domestic airlines in Kenya

Abstract

The profitability of the airlines in Kenya has been dismal over the years unlike their counterparts in the region. Studies relating to effect of tax incentives were done in developed and other developing countries other than Kenya. Similarly, some of these studies did not focus on domestic airlines. The current study sought to address the research gaps in literature by focusing on the effect of tax incentives on financial performance of domestic airline companies in Kenya. Therefore, the specific objectives of the study are: To establish the effect of capital allowances, export promotion incentives, tax holidays and VAT exemption on financial performance of domestic airlines in Kenya. The study results are expected to go a long way in benefitting various beneficiaries such as the government, researchers, researchers and academicians and corporate tax payers. The research was guided by Peacock Wiseman Theory of Public Expenditure, optimal tax theory, q theory of investment and Agency theory. The study adopted a descriptive research design where a census was used. The target population was the 15 Domestic airlines in Kenya. Data was collected from audited annual financial reports for individual firms found on the company’s website and library. The study collected data for a period of 5 years 2014- 2018. The study analyzed data by use of inferential and descriptive statistics that consist of mean, standard deviation, regression and measures of variations. The study concludes capital allowances incentives had a direct effect on the financial performance of domestic airline companies in Kenya. Some of the capital allowances enjoyed by domestic airline companies in Kenya include wear and tear allowances, and investment deduction. during the 5-year period (2014 to 2018) the capital allowance incentives to domestic airline companies has exhibited a dense volatility trend and wear and tear allowances are charged on capital expenditure on machinery and equipment led to positive financial performance of domestic airline companies in Kenya. The study concludes that provision of export promotion incentives promotes financial performance of domestic airline companies in Kenya, there exists a positive correlation coefficient between performance of domestic airline companies and export promotion. The study concludes that tax holidays had a direct significant influence on financial performance of domestic airline companies in Kenya, tax holidays by the current regime enables the domestic airlines to start and stabilize, tax holidays enable domestic airlines firms. The study concludes that VAT exemption incentives had a direct significance on financial performance of domestic airline companies in Kenya. The study recommends that the stakeholders in tax policy should reconsider the economic value of capital allowances incentives. The Government of Kenya should increase the capacity for it to incentives and negotiate for mutual and better benefits with the domestic airlines and other investors. The Government of Kenya should consider increasing the tax incentives granted to attract foreign direct investment, especially those provided to domestic airlines and other investors.