Consumers dodge high taxes, shift to illicit alcohol

Kenya Breweries Limited (KBL) is urging the government to reconsider its tax policy on spirits to tackle the dual challenge of declining revenue collections and the growing threat of illicit alcohol trade.

In Kenya, spirits have faced annual double-digit excise tax increases since 2015. This has exacerbated the affordability issue, compounded by soaring input costs like ethanol, which has surged by 61 percent, according to Mark Ocitti, Managing Director of KBL.

For the quarter ending in September, the Kenya Revenue Authority (KRA) recorded a 20.7 percent decline in spirits revenue performance for the first time in years. This shift in consumer spending patterns suggests a preference for illicit alcohol, which poses health risks and deprives the government of much-needed revenues.

Illicit alcohol in Kenya

Mr Ocitti added, “A recent industry report from Euromonitor indicates that nearly two-thirds of alcohol consumed in Kenya is illicit, meaning that more people are turning to harmful alternatives, endangering their lives and depriving the government of due revenues.”

In a presentation to the National Assembly, the KRA reported a 7.3 percent increase in taxes collected from beer, driven by the government’s decision to maintain excise tax rates. Domestically, excise duty collections grew by 22.1 percent to Kes20.4 billion in the first quarter of the current fiscal year. Excise duty revenue from beer increased by 7.3 percent, soft drinks by 21.2 percent, bottled water by 7.8 percent, and cosmetics by 13.3 percent.

KRA attributed this performance to higher volumes of delivered beer, soft drinks, bottled water, and cosmetics.

While tax collections in the beer category are expected to continue growing in the 2023/2024 financial year, encouraging the Treasury to maintain taxes at current levels as consumers adjust to recent pricing changes, the performance of spirits remains a growing concern.

The industry is also grappling with a new legal requirement to make excise tax payments within 24 hours, which has strained manufacturers’ cash flow at a time when cost inflation is impacting the industry significantly.

Mr Ocitti expressed his concerns about the difficulty of implementing the provision to pay Excise Duty in advance, calling it a burden on cash flow and overheads. He emphasized that smaller businesses might struggle to comply with this requirement.

Read also: Govt, Counties brew illicit rules to block bar licenses

Industry needs tax relief

This provision was introduced to combat illicit alcohol and changed the previous monthly Excise Duty returns to advanced payments, including weekends.

Mr Ocitti suggested that the current taxation rates are at a tipping point, where any further increase would result in diminishing returns for the taxman, with the potential for a decline.

He stated, “Apart from a deliberate plan to eliminate illicit alcohol, this industry needs tax relief, and we have witnessed the immediate impact in the current financial year. We require a stable, predictable environment, particularly at a time when manufacturers are facing numerous external supply shocks, currency depreciation, and reduced consumer spending.”

Earlier this year, EABL reported a 5 percent decrease in monthly consumer expenditure on alcoholic beverages both before and after the onset of Covid-19. Furthermore, in the most recent fiscal year, the company saw a 21 percent drop in profits, with revenue from its largest market, Kenya, declining by 4 percent due to the impact of multiple excise tax hikes as Kenyans adjusted to the changes.

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