IMPACT

Proposed higher sin tax potential hole for smugglers - Deloitte

According to Deloitte, higher excise taxes will potentially shift consumption to cheaper illicit products.

In Summary

•The Kenya Revenue Authority is also expected to adjust excise duty rates for inflation on the same products later in the year.

•According to Deloitte, higher excise taxes will potentially shift consumption to cheaper illicit products.

Anti-counterfeit inspector Ibrahim Bulle displays fake cigarettes impounded at the Port of Mombasa/FILE
Anti-counterfeit inspector Ibrahim Bulle displays fake cigarettes impounded at the Port of Mombasa/FILE

The government move to increase prices of beer, cigarettes, cosmetic products and bottled water is a potential loophole for smuggling, auditing firm Deloitte has warned.

Last month, National Treasury proposed to increase excise duty on these products by 10 per cent as part of the proposed new tax measures meant to help the government generate an additional Sh50.4 billion, in the 2022-2023 fiscal year.

The proposal is contained in the Finance Bill, 2022. Members of parliament have already voted to fast-track the bill.

The Kenya Revenue Authority is also expected to adjust excise duty rates for inflation on the same products later in the year.

The adjustment of specific excise duty rates for inflation is geared towards ensuring that excise duty revenue generated from such goods grows in tandem with the general increase in price of goods.

According to Deloitte, higher excise taxes will potentially shift consumption to cheaper illicit products and promote cross border smuggling especially from jurisdictions where the taxes are lower than in Kenya.

"If the above increments are passed into law, the same will likely have adverse effects on the affected industries particularly considering recent annual inflationary adjustments on the same products," experts at Deloitte said.

They warned that the continued increase of excise duty on the goods could potentially reduce the demand for these products, which will ultimately lead to the exit of some of the players in the affected industries.

This will also discourage investment in the affected industries.

"In the long run, the suppressed demand of the excisable goods may reduce excise duty revenue generated from these products," Deloitte said.

Sin taxes on cigarettes and alcohol have traditionally been the target of finance ministers for additional revenue, but in recent years the pool has been widened to include widely used items such as bottled water, confectionery, motorcycles and petroleum products.

Beer attracts excise at the rate of Sh121.85 per litre, while filter cigarettes attract a levy of Sh3.47 per stick. Excise on bottled water and juice is charged at Sh6.03 and Sh12.17 per litre respectively.