The National Treasury has been urged to seriously reconsider its approach to taxation on manufacturing as it prepares its Budget for the coming financial year, in order to salvage value chains and ease consumers of the extra cost of goods.
Economic analysts and private sector players say tax policies need to be adjusted with all players and economic trends in mind, to stimulate growth rather than stifle manufacturing.
According to Kwame Owino, chief executive officer at the Institute of Economic Affairs (IEA), increasing excise duty rate on products whose consumption is falling due to an increase in excise will be detrimental to the economy, given the current standards of living.
He added that retail sales have been weak in the last year and this is the case because of reduced consumer spending. Since incomes have been flat over the last five years, any further increase in the excise rate will be detrimental to growth in this economy.
''Kenya’s excise rates are some of the highest in the region, motivating smuggling, especially along with border areas,” Owino said.
Treasury increases excise duty annually based in line with inflation, and this is then incorporated into a formula based on the Excise Duty Act.
Kenya Private Sector Alliance (KEPSA) CEO Carole Karuga said the lobby is the process of engaging government on the tax policy and this is one of the areas it intends to discuss.
“Our view is that taxation should not be punitive or stifling to businesses. The focus should be more on revenue generation or stimulation to drive growth momentum,'' she said.
That way, she added, a country gets more businesses and many grow and then Government can get revenue much easier.
The annual increases often impact manufacturers with alcoholic beverages one of the hardest-hit industries in recent years.
Private sector players now fear tax increases have reached a tipping point and will likely decimate value chains for farmers and small and medium enterprises serving big manufacturers.
For instance, East African Breweries Limited (EABL) reported a one per cent drop in the volume of beer in its half-year results, attributed to the tax increase, which forced the company to pass it on to consumers.
Industry data shows excise tax rise on alcoholic beverages has resulted in a 100 per cent increase in the price of beer over the past 10 years with the industry’s ‘sin taxes’ viewed as the soft target by the Treasury.
However, with Kenya’s excise tax rates higher compared to other countries in the region, policy experts now warn that tax policy is increasingly becoming counterproductive.
Kenya’s Excise Duty is more than 400 per cent higher than Tanzania’s and more than 300per cent higher than that in Uganda, which places the country at a disadvantage and encourages smuggling across borders.
According to Alcohol Beverages of Kenya (ABAK) chairman, Gordon Mutugi, There is every likelihood of the return of illicit brews because consumers buying our products can no longer afford them and are resorting to informal alcohol which the government cannot collect taxes from.
“Our industry is facing near collapse on the back of a persistent increase in excise tax. The government will have to think very hard about broadening the tax band, rather than ruining gains made in our industry over the years,'' Mutugi said.
