Service sector stares at job cuts on impact of inflation related taxes

Possible Sh20 billion in earnings at stake, bars, hotels and liquor traders warn.

In Summary

•Kenya has been exposed to high illicit trade, mainly goods smuggled from neighbouring countries, blamed on costly products which is occasioned by high taxes.

•Alcoholic drinks, juices and cigarettes are the mainly smuggled goods. 

Attendants clean a bar in Nairobi/FILE
SLOW BUSINESS: Attendants clean a bar in Nairobi/FILE
Image: FILE

Kenya’s service sector is staring at stunted growth with sector players warning of an imminent massive lay-offs and a cut in earnings by traders and their distribution network.

This is if Kenya Revenue Authority (KRA) goes ahead to implement the annual inflation adjustment on excise duty set at 6.3 per cent.

This is pegged on the average rate recorded in the last financial year (2021/2022), with the government seeking to cushion revenues in the wake of rising inflation.

Some of the products that are targeted for price increases include beer, bottled water, cider, fruit juices, berry and other fermented drinks.

KRA will be seeking Sh142.44 per litre of beer , or two bottles of 500ml,up from Sh134, while excise on wines will be Sh243.42 for every 208 litres, up from Sh229.

Spirits will be charged Sh356.42 for 278 litres up from from Sh335.30.

For smokers, you will be giving the taxman Sh4.06 for filtered cigarettes up from Sh3.82.

Bottled waters prices are also expected to go up by between Sh5 and Sh130 depending on quantity.

The increase in the prices of alcoholic drinks and some excisable goods come barely three months since another increase was effected under the Finance Act in July, when excise rates for beer and spirits were adjusted upwards by 10 per cent and 20 per cent, respectively.

Some outlets increase beer prices by between Sh10 and Sh20 per bottle.

According to the sector lobby group – The Bars, Hotels and Liquor Traders Association (BAHLITA), the impact so far includes a decline of 21 per cent and 32 per cent in barley and sorghum-based beers, respectively.

With KRA expected to effect the adjusted excise duty on inflation from October 1, a the association has warned a further price increase will lead to lower sales, with some businesses being forced to reduce operations hence lay-offs.

Locally manufactured finished goods distribution and retail alcohol trade (which is dominated by Micro and Small Enterprises-MSMEs) is expected to lose Sh 4.2 billion in reduction of raw material use, BAHLITA has said.

At least Sh15.7 billion is expected to be lost in employment income on about 35,364 jobs which will be lost.

“There is a need to give time to investors in the Bar and Restaurant industry to recover from the effects of Covid-19. Two years down the line, the industry is still struggling to get back to its feet,” General secretary Boniface Gachoka said.

The sector players have called on President William Ruto to intervene and allow for further stakeholder engagement in line with his campaign promises, which were premised on lowering the cost of living and securing jobs for the ordinary Kenyans.

KRA Commissioner General is required to adjust annually the specific rates of excise duty taking into account the rate of inflation.

“We find this to be an excessive over-taxation to the ordinary mwananchi who is looking at the government to cushion it from such vagaries,” BAHLITA , which has given its views through a memorandum to KRA, notes.

Meanwhile, industry players and manufacturers have warned of an increase in illicit trade mainly excisable goods, which have traditionally been smuggled from cheaper markets of neighbouring countries.

In Kampala, Uganda for instance, a beer averages Ush4359 (Sh137), while it goes for as low as Sh100 and Sh60 in Tanzania and Ethiopia, respectively.

This has made it attractive for Kenyan traders, mostly those near the borders, dealing in illicit trade, with residents of border towns preferring to cross the border for the products.

“Repeated tax increases on alcohol, for example, have created a situation whereby nearly half, about 44 per cent of the alcohol consumed in Kenya is illicit,” Retail Trade Association of Kenya (Retrak) CEO Wambui Mbarire notes.

The Kenya Association of Manufacturers (KAM) also warns an increase in taxes will increase the consumption of illicit alcohol, amid reduced production which will deny the government revenue.

Reduced beer production also means a cut in barley production, which will hit farmers hard.

Uganda and Tanzania have managed to retain their taxes in the last four to five years, making Kenyan industries uncompetitive while fueling the entry of contraband into Kenya.

The country loses more than Sh153 billion tax revenue annually to illicit trade, according to the Anti-Counterfeits Authority(ACA).

About Sh4 billion in annual excise revenue is estimated to be lost through illicit cigarette trade.

Low business activities are likely to dampen the service sector's growth, which had been projected at 25.4 per cent this year.

According to the Central Bank of Kenya, it has been among key drivers of the economy this year, having grown at 56.2 per cent in the first quarter of this year,  after a 47.7 per cent contraction at the height of the pandemic in 2020.

The Survey of Hotels revealed sustained strong activity in the sector, and showed conferencing services and bed occupancy at levels surpassing pre-pandemic levels.

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