Kenya said on Wednesday it is developing a framework to assume responsibility for all taxes that will be incurred during the construction of the Standard Gauge Railway (SGR).

National Treasury Deputy Director of Economic Affairs Wanyambura Mwambia told a taxation forum in Nairobi that the framework is necessary as the project is being financed through external funding.

"The project funding agreement precludes the use of project monies for the payment of local taxes including import taxes and Value Added Taxes (VAT) levied on locally purchased goods and services," Mwambia said during a sensitization workshop for business identified to supply goods and services to the SGR.

China has agreed to finance 90 percent of the construction of the 3.8 billion U.S. dollar infrastructure project. The Mombasa- Nairobi standard gauge railway, whose construction has kicked off, is set to beef up local businesses .

The East African Standard Gauge Railway, planned to be operational by 2018, is poised to haul 28 million tonnes of cargo annually between Kenya, Uganda, and Rwanda.

Mwambia said the arrangement will allow project implementation to proceed smoothly within the existing legal confines while also removing the risk of non-compliance with VAT requirements for SGR suppliers.

The East African nation's VAT Act of 2013 does not provide for exemption of VAT on goods and services procured for the SGR project. "So, the taxes will have to be funded by the government from which Kenya Revenue Authority (KRA) is required to collect the money," he said.

KRA Commissioner General John Njiraini said the railway project is one of the key deliverable of the national economic blueprint Vision 2030.

"KRA will therefore facilitate the completion of the project by facilitating the smooth and speedy importation of project materials," said Njiraini, adding that KRA shall institute specific accountability requirements, including regular submission of information specific to SGR supplies.

The KRA official added that the project contractor shall be required to maintain a high level of integrity so as to prevent leakage of SGR supplies into the open market. Njiraini said the list of suppliers will be monitored closely to ensure there is no abuse of this arrangement.

According to the tax agency, the measures are being implemented as interim actions pending decisions regarding a longer term framework to support SGR project tax issues.

"As Kenya implements more and more ambitious projects in its quest to become a middle income country, the need will arise to continually review tax processes to match the new demands," said the commissioner general. Endi

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