Job losses, revenue shortfall loom in excise stamp increase

Kenya Revenue Authority is staring at a potential revenue shortfall if the government proceeds to increase price of excise stamps, manufacturers and retailers have warned.

The country is expected to witness a rise in tax evasion, growth of illicit trade and low sales volume for manufacturers, retailers and importers, amid high operating costs which could see some companies lay-off staff to remain afloat.

National Treasury has proposed an increment of up to 300 per cent on the cost of excise stamps as part of the government's aggressive drive to increase its revenue collection.

The Excise Duty (Excisable Goods Management System) (Amendment) Regulations, 2023 proposes to raise the stamp fees for cosmetics from 60 cents per stamp to Sh2.50, from March 1.

Stamp fee for fruit juices and non-alcoholic beverages such as sodas will go up to Sh2.20, from 60 cents.

Those affixed on beer bottles will double, from Sh1.50 to Sh3, while those for spirits, wines and tobacco products have been proposed to go up to Sh5, from the current Sh2.80 per stamp if approved.

According to the Retail Trade Association of Kenya (RETRAK), the additional cost will be passed down to the consumers as they cannot be absorbed.

“This will result in reduced demand and a potential increase in illicit trade which will affect the viability of many small businesses,” Retrak notes.

Illicit prevalence will increase, subjecting the consumer to unregulated, tax-evaded, substandard and potentially harmful products, it notes.

No clear justification has been given for the proposed increase, the retail sector lobby group now says, noting as of today, Kenya already has the highest cost of tax stamps globally.

There should be a shift from paper to digital stamps with full track and trace capability, Retrak says.

This will reduce costs and improve compliance.

Kenyan products are currently expensive compared to manufacturers in the region, which continues to see smuggling of cheaper goods from neighbouring countries, with the taxman losing on revenue.

The tax stamps are essentially put on the product to mitigate illicit, but according to Retrak, they have proved ineffective because of a lack of sufficiently punitive measures against illicit players.

Counterfeiting of stamps has also been prevalent and  the lenient approach by government towards non-compliant traders is said to have failed to inspire confidence among manufacturers.

Instead, it has made the country unattractive to legitimate players which is against the government core agenda, as well as the Kenya economic blueprint- Vision 2030.

Overtax 

Stop Crime Kenya (StoCK) also notes Kenyan manufacturers are paying the world’s highest fees for excise tax stamps – even before the controversial price increase proposed by the National Treasury.

The discredited stamps, which are meant to combat counterfeiting and smuggling, are up to 70 times more expensive in Kenya than they are in Europe, where they offer full track-and-trace capability.

 “The exorbitant fees that Kenyans are being charged for excise stamps make it imperative that KRA addresses transparency issues,” said Stephen Mutoro, chairman of Stop Crime Kenya (StoCK).

In Europe, where stamps offer full track-and-trace capability, Sweden’s cigarette manufacturers for instance pay the equivalent of Sh36 for a pack of 1,000 stamps.

In the UK, the price is Sh95 while in Turkey the price is Sh625.

In Kenya, the price is a breath-taking Sh2,800 which is expected to rise to . Sh5,000 if the new increase is enforced on March 1.

“These fees are ultimately paid by Kenyan consumers, who will face higher prices that will exacerbate the soaring cost of living,” said Mutoro.

The government is losing over Sh153 billion tax revenue to illicit trade with Kenya recording a rise in smugling of fake ciggarettes, alcoholic drinks among other excisable goods.

Companies that would be hard hit include East African Breweries, BAT and Keroche Breweries, with high operational costs likely to lead to business reviews that will affect the entire supply chain.

EABL has already reported a drop in sales volumes in the Kenyan market, as its half-year sales to December remained flat at Sh8.7 billion, which it attributed to high cost of goods.

Beer volumes went down 13 per cent in Kenya, with performance further undermined by the re-emergence of illicit alcohol during the period under review, the company says.

The proposal to increase stamp prices comes barely four months after a 6.3 per cent inflation adjustment on specific excise tax rates was effected on October 1.

It impacted cosmetics, confectionary, alcoholic and non-alcoholic beverages including bottled water, and tobacco and nicotine products, among other products. 

Three months before the inflation adjustment, there was an increase in excise taxes from July 1,  2022, by between 10 per cent and 20 per cent through the Finance Act, 2022.

Last week, the Kenya Association of Manufacturers (KAM) said it was “alarmed” by the back-to-back tax increases, which are detrimental to the sector, warning an unstable, and unpredictable tax regime will scare away investors.

"The proposed costs will further make Kenyan products uncompetitive at the global market, due to the high cost of compliance and unpredictable regulatory environment," KAM chairman Rajan Shah said in a statement. 

The Excisable Goods Management System (EGMS) stamp is a revenue assurance tool that was first implemented on alcoholic drinks and cigarettes in 2013, before being expanded to other excisable goods. 

It aims at deterring counterfeiting, ensure traceability of excisable goods along the supply chain, accounting of excisable goods manufactured or imported, and facilitate any persons in the supply chain to authenticate the stamps and excisable goods.

Treasury is however seems to be turning EGMS into a revenue collection mechanism as opposed to an assurance tool.

"We are afraid that such increment to some of the most counterfeited items in Kenya will further encourage counterfeit and illicit trade,"Shah said.

This, he said, will deny government revenue apart from encouraging illegal trade on substandard and highly dangerous goods.

Manufacturers have also warned that an increase will result in low sales and in turn, have a negative effect on revenue streams from manufacturers such as VAT, PAYE, and income tax, among others.

"The ripple effects will be a downside from job creation to job losses and affect many livelihoods," KAM says.

It said meaningful consultative engagements, competitive bidding of suppliers, and joint impact assessment with the industry need to be conducted and, in this case, it would be on the impact of the cost of stamps to the overall cost of production.

KAM said Kenya must make cost comparisons to other countries, regionally and globally, to ensure the country remains competitive.

From its analysis, the association says Kenya’s cost is amongst the highest, with the price of stamp and its administrative requirements costing the same as the price of the product.

This continues to make Kenya uncompetitive as an investment hub.

KRA is already lugging behind in revenue collections, having missed the target for July-November last year by 32.2 billion shillings, Treasury data shows.

During the period, the taxman collected 786.5 billion shillings in taxes against the target of 818.7 billion shillings that had been set by the National Treasury for the period.

Manufacturers have warned the country’s tax regime poses a risk of suppressing the manufacturing sector’s contribution to the Gross Domestic Product (GDP), which has shrunk  from nine per cent to seven per cent.

Investments, Trade and Industry Cabinet Secretary Moses Kuria has blamed the drop to cheaper imports, a trend driven by among others, high costof production in the country.

The government targets to increase the sector’s contribution to the economy to 15 per cent by 2027, and at least 20 per cent by the year 2030, which manufacturers in the country say will not be achieved if the business environment is not friendly.

To achieve this, manufacturers have called on the government to ensure predictability  and stability in the country's tax regime, which will attract long-term investments.