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New excise duty bad for businesses, recipe for illicit trade–KAM

Manufacturers say the sector is already bleeding from effects of Covid-19

In Summary

•KRA has announced new rates for alcohol, cigarettes, water, imported sugar confectionery, imported white chocolate, motor cycles and fuel products.

•KAM says with inflationary adjustment and the Covid-19 pandemic ravaging the economy, it will be impossible for manufacturers to break-even and recoup their investments.

Sample of alcohol bottles in a liquor shop
Sample of alcohol bottles in a liquor shop
Image: COURTESY

The inflationary adjustment on specific duty rates will hurt manufacturers and encourage illicit trade, the Kenya Association of Manufacturers (KAM) has warned.

Kenya Revenue Authority(KRA) has announced new rates of excise duty on alcohol, cigarettes, water, imported sugar confectionery, imported white chocolate, motor cycles and fuel products.

According to KAM, the manufacturing segment for excisable goods has attracted huge investments from new and existing manufacturers in recent years.

 

With the inflationary adjustment and the Covid-19 pandemic's impact on the economy, KAM chief executive, Phyllis Wakiaga says it will be impossible for manufacturers to break-even and recoup their investments.

“This will also send wrong signals to potential investors. Additionally, a price increase for the affected products will reduce affordability and force consumers to source cheaper products, which will drive them to buy illicit goods,” Wakiaga said.

Illicit trade had been prevalent for cigarettes and alcoholic beverages prior to the Covid-19 pandemic.

Both ad valorem (tax based on the assessed value of an item) and specific excise duty rates are very high in Kenya compared to Uganda and Tanzania, KAM notes.

This gives rise to  opportunities that promote illicit trade.

For example, excise tax per litre of beer in Kenya is Sh100.62, and Sh18.03 and Sh33.66 in Uganda and Tanzania, respectively.

For cigarettes, the excise tax payable in Kenya is more than double that of Uganda and Tanzania, meaning local traders are likely to source for cheaper products from the neighbouring countries while evading tax, amounting to illicit trade.

 

Wakiaga said the inflationary adjustment will not only impact alcoholic and non-alcoholic beverages and cigarettes but also petroleum products used by manufacturers and households.

“This will make it impossible to maintain a low (single digit) inflation regime in Kenya,” she said, “it could not come at a worse time, as the country grapples with the adverse effects of the Covid-19 pandemic, which worsened an already challenging business environment for local manufacturers.”

The duty comes a further pain for local industries already hard hit by effects of Covid-19.

The containment measures put in place by the government to curb the spread of the virus led to a decline `in economic activity, increased unemployment (an estimated 1.7 million Kenyans have lost their jobs), resulting in reduced consumer spending.

The inflation adjustment is also inconsistent with the country’s development goals, including the Big Four Agenda, KAM noted.

“ While the Big 4 Agenda seeks to grow manufacturing, the proposed increase in excise tax will only serve to undermine such efforts. The increase will also work against the recovery of manufacturers, who have been severely battered by the pandemic,” said Wakiaga.

The move, she said, will interfere with backward integration, thus disrupting the value chain.

A KAM-KPMG survey on the impact of the pandemic (May 2020) revealed that demand for essential goods manufacturers reduced by 74 per cent , with 76 per cent of manufacturers experiencing severe cashflow constraints.

Increasing prices for the excisable goods will be detrimental on manufacturers that are struggling to remain afloat, KAM said.

KRA last Friday informed manufacturers and importers of excisable goods of new excide duty rates, adjusted using the average inflation rate of 4.94 per cent for the ficnancial year 2019/20.

“The adjusted rates are effective October 1, 2020,” KRA commissioner for domestic taxes department said in a statement.

The new rates are likely to see manufacturers either shoulder the burned, or pass it to consumers, a move that will increase the prices of beer, cigarettes, bottled water, wine, white chocolate and motor cycles, by up to 30 per cent, depending on their tariff rates.

The prices of fuel have already been affected by the new rates as announced by the Energy and Petroleum Regulatory Authority, where prices of petrol went up by a further Sh1.12 to retail at Sh 106.55 for a litre in Nairobi.

Those those of diesel and kerosene had an upward excise adjustment of Sh 0.58, pushing the price per litre to Sh95.09 and Sh83.73, respectively.