Excise tax adjustments are a bane to Kenya’s economy

At this time of the year, and every other year, the Kenya Revenue Authority (KRA) sets out new excise duty rates for excisable goods as it seeks to cushion itself from tax revenue losses resulting from increased prices or inflation.

Traditionally, this transition has been smooth with the adjustments kicking in without much uproar from key stakeholders; the manufacturers and consumers of excisable products.

However, the trend has shifted in recent years following the upward revision of other tax rates and a spiralling uptick in the cost of commodities in the markets.

This has seen KRA’s planned excise tax rate adjustments challenged in court with some of the suits finding their way to the apex court in Kenya for determination.

On paper, excise taxes are expected to be passed on to the consumers of excisable goods such as cosmetics, alcoholic beverages, cigarettes, motorcycles and confectionery.

However, with marginal or no increase in disposable incomes, the impact of higher excise duty rates translates to a huge hit on the consumers of the excisable goods.

Economic data show that KRA is for instance on the losing end of recent excise duty rate increases alongside the frequency with which the industry has given rise to new jobs. In the last three years, millions of workers have suffered income losses owing to the Covid-19 pandemic that triggered salary cuts and business closures.

The alcohol industry, which is primarily the bearer of the burden of excise tax adjustment for instance estimates revenue losses for KRA at billions of shillings.

Read also: Inflation adjustment by KRA is simply a double tax on consumers

The industry notes that increases in tax rates through the Finance Act 2022 led to a decline in alcohol consumption and subsequent lower collections for the exchequer.

The industry estimates tax losses from the rate surges at 20 percent or a total of Kes.19.8 billion with excise duty adjustment digging the biggest hole in the taxman’s basket at Kes10.9 billion.

On jobs and income within the sector, an estimated 35,364 employment openings are to be lost as a result of tax rate hikes including 300 direct engagements, 864 distributable occupations, 30,600 careers at on-trade locations such as bars and other entertainment joints and 3,600 income-earning opportunities within the off-trade system.

The loss of jobs translates to further tax leakages for the KRA as the taxman losses out on collections from other categories such as Pay As You Earn (PAYE) and corporation taxes in the event investors are forced to close their establishments.

A more profound impact is, however, felt further away from the manufacturing hubs and city nightclubs with an even greater devastating blow to the country’s economy.

For instance, thousands of farmers in Western Kenya are contracted by companies such as Kenya Breweries Limited (KBL) to provide a steady supply of key raw materials such as sorghum and millet.

The manufacturer recently opened a Kisumu-based brewery which mainly produces powdered beer, popularly referred to as Keg by revellers. Keg manufacturing relies fully on inputs supplied by the farmers.

Estimates show the farmers, who have recently experienced financial liberation from the contracts with manufacturers stand to lose upwards of Kes500 million from the reduced demand for inputs which stems from reduced alcohol consumption.

In the bigger picture, the impact of the excise duty rate increase transcends beyond the country’s borders as the unaffordability of goods from the rate adjustment fuels trade in illicit and contraband drinks.

With the rate of excise duty unchanged over the last four years in neighbouring Uganda and Tanzania for example, merchants have found an easy loophole to sneak in cheaper goods through border points.

At the same time, consumers have turned to illicit products as the affordability of goods such as alcoholic beverages and cigarettes becomes untenable with the prevailing rate of taxes amid diminishing incomes.

This means more losses for the exchequer and KRA as excisable goods remain on supermarket shelves and bar counters untouched.

In consideration of the impact of higher tax rates, the taxman must therefore opt out of lifting the rates as scheduled for October 1st to incentivise consumption in a tumultuous economic environment to help save jobs, incomes and even its own collections as the country smarts out of the pandemic.

Previous increases in the rates of excise duty have seen a stagnation in the total excise collection informing the need for a pause in planned adjustments.

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