The hangover of raising taxes

Like any alcohol consumer will tell you, the more you drink the nastier the hangover will be, and perhaps the taxman should take a lesson here as well.

For years, alcohol has been the go to area for sin taxes and inflation adjustments with every budget cycle marked as a nightmare for alcohol manufacturers as the taxman almost certainly moves to effect higher taxes on beer, wines, and spirits.

For policymakers, years of raiding alcoholics until the intoxicant became the most expensive in Kenya compared to regional peers was a good policy meant to stop the harm of alcohol in productivity, health outcomes and gender violence.

Policymakers also loved alcohol tax because consumers have been showing just how Kenyans elasticity to price shocks can be stretched without limit.

But this assumption has come to an end perhaps signaling what officials should anticipate as they go ham on increasing all manner of taxes.

The government lost Kes1.3 billion in excise revenue on beer alone in 2022 due to tax increases, data from Economic Survey 2023 shows. Kenya earned Kes27.3 billion from excise duty on beer last year, a reduction from the Kes28.6 billion collected from the product in 2021.

In the year under focus, excise from spirits went up by Kes1.97 billion to Kes18.96 billion signaling the changing preference for spirits over beer in the Kenyan market.

Tabled before the National Assembly on 4 May 2023, the government steered clear of further excise increases targeting alcohol for the first time in five years in the Finance Bill 2023.

Instead, the Bill seeks to introduce a new rate of excise duty on fees charged on the advertisement on television, print media, billboards, and radio stations on alcoholic beverages, betting, gaming, lotteries, and prize competitions which is now set at the rate of 15 percent.

The proposed fees will be part of the government’s stricter regulations on betting, gaming, and their advertisement together with that of alcoholic beverages.

Read also: Beer drinkers are giving up their brews as inflation bites

The 15 percent fees will place millions of consumers involved in such services to heavier tax obligations, which will likely have the ripple effect of discouraging the use of such services.

But whereas fiscal measures impacting alcohol consumption are nothing new, the market seems to be telling a different story, which hopefully policymakers are reading, there are limits to how much you can tax an item before consumers stop using it for substitutes or abandon consumption all together.

When releasing regional brewer EABL’s half-year results in January, Group CEO Jane Karuku said “excise-related price increases in Kenya,” which were rolled out in July and October last year, “significantly affected consumption of our brands.”

Tax proposals powering the 2022/23 budget last year saw Kenya’s excise tax for beer and spirits go up by 10 percent and 20 percent, respectively.

In October 2022, consumers of beer and spirits in Kenya were forced to sustain another gut punch as the taxman effected a further 6.3 percent excise tax upward revision to cater for annual inflationary adjustment.

These market disruptions in tax hikes amid thinning incomes due to the Covid-19 pandemic economic fallout, came on the back of an upward excise adjustment in 2021, resulting in a compounded annual excise tax increase of 23 percent for beer and 34 percent for spirits.

With rising excise taxes, EABL said beer volumes dipped 13 percent in Kenya, even as the use of illicit alcohol grew in the six-month period that ended in December 2022.

Kenya seems to be reaching a point where the entire alcoholic beverages industry is being negatively impacted by the government’s thirst for more taxes.

According to the Kenya National Bureau of Statistics, excise duty collected from domestically manufactured beer dipped to Kes19.3 billion when Covid-19 hit in 2020 leading to the closure of bars. In 2019, Kenya earned Kes27.8 billion in beer excise receipts.

And it may be getting retrogressive pushing consumers not only into cheaper options but harmful ones as illicit brews return to the market.

Read also: The shock of one million youth in severe drug addiction

Nacada, the country’s watchdog on the use and control of drugs, says nearly four out of every 10 Kenyans had the perception that the production of illicit brews was widespread in their community with Western region recording the highest perception level (68.2 percent) followed by Nyanza (53.2 percent) and Rift Valley (41.5 percent).

The 2022 study adds that 53.7 percent of Kenyans had the perception that consumption of illicit brews was widespread in their community with the Western region recording the highest perception level (85.8 percent) followed by Nyanza (81.9 percent) and Rift Valley (55.6 percent).

Sustained upward revision of excise duty has, however, seen an increase in customer footfall in illicit dens where the government doesn’t have a chance to collect any revenues.

Consumption of illicit alcohol can result in a range of health problems, including organ damage, poisoning, blindness, neurological disorders, and even death. These risks are amplified by the unpredictable nature of illicit alcohol production.

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