High taxes recipe for rise in illicit trade, low revenues – EABL

Stop Crime Kenya (StoCK) says increasing excise costs will further hurt industry, consumers.

In Summary

•According to the Retail rade Association of Kenya, about 44% of alcohol consumed  in Kenya is illicit as a result of repeated tax increases.

•The Anti-Counterfeit Agency (ACA) data shows illicit trade denies the taxman up to Sh153.1 billion annually.

Counterfeit alcohol seized in Mosoriot area, Nandi county.
Counterfeit alcohol seized in Mosoriot area, Nandi county.
Image: FILE

Sin tax is proving to be the first target of the government when it seeks to increase revenue collections.

In less than one year, the government is already knocking on the doors of manufacturers, importers and dealers in yet another proposed increase in excise tax.

This time round, National Treasury is seeking to raise the price of excise stamps by up to four times, a move that will see prices of excisable goods such as alcohol, juices, cosmetics and cigarettes further increase.

The Excise Duty (Excisable Goods Management System) (Amendment) Regulations, 2023 proposes to increase the cost of a stamp affixed on a beer bottle to Sh3 from Sh1.50, while those for spirits, wines and tobacco products are set for a 79 percent rise to Sh5, from the current Sh2.80 per stamp.

In July 2022, Kenya’s excise tax for beer and spirits came into effect following the 2022/23 Budget, increasing by 10 per cent and 20 per cent, respectively.

In October 2022, beer and spirits consumers were hit by a further 6.3 per cent excise tax increase in the form of annual inflationary adjustment.

These increases came on the back of an annual upward excise adjustment in 2021, leading to a compounded annual excise tax increase of 23 percent for beer and 34 percent for spirits.

This has hit hard the likes of East African Breweries whose beer volumes went down 13 per cent in Kenya, with performance further undermined by a re-emergence of illicit alcohol during the period under review.

Group’s half-year sales to December remained flat at Sh8.7 billion, due to high cost of goods.

It reported a Sh57.3 billion in net sales for the period, representing a four percent growth compared to the same period last year.

During this period, Group volumes declined by four percent year-on-year, as price increases impacted consumer purchasing patterns, mainly in mainstream and value segments.

“EABL faced an exceptionally challenging time related to macro-economic volatility and drought situation across East Africa, global inflation, and geo-political disruptions related to the Russia-Ukraine war. This was further

compounded by excise-related price increases in Kenya, effected in July and October, which significantly affected consumption of our brands,” EABL Group Managing Director and CEO, Jane Karuku said.

EABL’s net sales growth regressed by one percent in Kenya, its largest market, while Uganda and Tanzania grew by 19 per cent and 11 per cent, respectively.

Board has nevertheless recommended an interim dividend of Sh3.75 per share, similar to the same period last year.

Any tax increases automatically lead to price hikes, which the brewer said it has no choice but to pass the same to consumers.

The back-to-back tax increases coupled with high production costs in Kenya, mainly electricity costs and logistics, is expected to drive up costs of excisable goods, opening the market for illicit trade mainly on cheaper counterfeits.

According to Retail Trade Association of Kenya (Retrak) , 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.

The Anti-Counterfeit Agency (ACA) data shows illicit trade denies the taxman up to Sh153.1 billion annually.

The country is also losing between Sh85 billion and Sh100 billion annually to counterfeiting activities alone. 

EABL is equally concerned over the rising prices, which are likely to reduce sales and affect its growth in Kenya, while consumers opt of cheaper products.

“We hope someone is listening to us. A drop in volumes means low sales and taxes for the government,” Karuku said.

Stop Crime Kenya (StoCK) which has a secretariat at the Consumers Federation of Kenya (Cofek), says increasing fees for excise stamps by up to 317 per cent is another gift for criminals involved in illicit trade and another setback for consumers already battling with record prices.

The massive hike will push up the prices of alcohol, cigarettes, fruit juices and make-up, which must carry the stamps under the controversial Excisable Goods Management System (EGMS).

StoCK chairman Stephen Mutoro says: “This is yet another unwarranted fiscal assault on citizens struggling to cope with the soaring cost of living. And it will ultimately backfire by driving goods to the black market, thereby actually reducing the Treasury’s revenues.”

The foreign-run EGMS, by Swiss company–SICPA, Mutoro notes has been dogged by high costs and inefficiency since its introduction in 2013.

“StoCK’s own research shows the system is not fit for purpose as most Kenyans cannot identify a genuine stamp and almost as many don’t even know the stamps’ purpose,” he said.

An estimated one in every five products sold in Kenya is counterfeit and the Kenyan Association of Manufacturers (KAM) has reported that the market is flooded with fake stamps.

“This increase in fees will simply increase pressure on legitimate producers and offer new incentives for counterfeiters and smugglers who use fake stamps. Honest jobs will be lost, the state will be robbed of vital funds and consumers’ lives will be put at risk,” said Mutoro.

“Instead of this clumsy price hike, a comprehensive review of the discredited excise stamp system is urgently needed to enforce compliance, boost the economy and protect consumers.”

Developing a national policy and legislation around beating illicit trade would go a long way in easing the impending heavy tax pressure on ordinary Kenyans already hit by the retiring of all subsidies on electricity, fuel and other key services, he added.

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