•Under the proposed measures, the average rate will increase from Sh356.42 to Sh640 with 95 per cent of the spirits portfolio being affected.
•Ethanol is also moving to an ABV calculation – currently paid at Sh356 per litre and will move to Sh1,600 with manufacturers not be able to claim.
Image: FILE
Illicit alcohol could take up to 70 per cent of the alcoholic drinks market in Kenya, industry players now warn, as Treasury proposes to increase excise tax on spirits by up to 79.9 per cent.
This means out of every 10 bottles of whisky or hard liquor sold in Kenya, seven are likely to be illicit and counterfeit alcohol, which is produced illegally outside of the approved and regulated production processes of registered and legitimate manufacturers.
According to manufacturers and sector players, the proposals in the Finance Bill 2024 will have a significant impact on prices which will nearly double, pushing products out of reach for the majority hence driving consumers to cheaper alternatives.
The Finance Bill proposes a new method of calculating excise on beer, wine and spirits based on pure alcohol content also known as Alcohol By Volume (ABV), unlike the present method, which has a flat excise rate.
Under the proposed measures, the average rate will increase from Sh356.42 to Sh640 with 95 per cent of the spirits portfolio being affected.
Industry data shows most of the consumption (69%) happens at 40% ABV at 250ml (recommended retail price sub-Sh300).
This means that the price increase will hit the consumer category the hardest, with the least price increase for compliant players set to be Sh100 per 250ml for most popular ABV, which is 40 per cent.
Local manufacturers will offset input excise tax on ethanol, glass, concentrates, sugar and other inputs used in manufacturing alcohol.
For spirits, this means that manufacturers will pay excise duty on the inputs as well as the final product.
The provision will make the local manufacturing of spirits untenable and could force manufacturers to relocate to other countries, leading manufacturer–East African Breweries Limited (EABL) now says.
“It amounts to double taxation, in violation of taxation principles, and reduces Kenya’s export competitiveness,” the regional player said, even as it pointed to lower tax regimes in neighbouring countries which are making Kenyan products uncompetitive.
Ethanol or Extra Neutral Alcohol (ENA) is also moving to an ABV calculation – currently paid at Sh356 per litre, which the manufacturers are currently able to claim back.
The excise duty will go to Sh1,600 and manufacturers will not be able to claim it if the Finance Bill is passed in its original state, hence will be forced to pass it on to customers.
This is in addition to importing costs of raw materials, where Kenya lacks adequate capacity to produce glass locally and manufacture industrial sugar.
“While the new proposals are informed by the study commissioned by the Treasury, the policy and lawmakers should also consider the current situation with regards to economic circumstances and the prevalence of illicit alcohol across the country,” EABL led by Group CEO Jane Karuku said.
A recent study by London headquartered consulting firm–Euromonitor revealed illicit alcohol has taken up to 59 per cent of the local market, meaning up to six of every 10 bottles.
The country also loses an average of Sh71 billion in taxes annually as a result of the proliferation of the sale of illicit alcohol, the survey that was commissioned by the Alcoholic Beverages Association of Kenya (ABAK), on the impact of illicit alcohol on the economy, indicates.
If the proposals are effected, more consumers are likely to be pushed out of affordable genuine products to cheap illicit liquor.
Majority of the spirits sold in the market have an ABV of between 37 per cent and 45 per cent meaning excise duty per litre will jump to Sh592 per litre, while for those with an ABV of 45 per cent, the excise will jump to Sh720 per litre.
“If we take in the excise duty on the finished product, it moves to Sh400. If we include, now that we can’t claim back the input cost that we paid on the ethanol, it moves to Sh770 for a 250-ml bottle,” EABL Group Corporate Relations Director, Eric Kiniti, explained.
A 750ml bottle that is going for as low as Sh1,000 will go for above Sh2,000, sector players have warned.
This means it will also be cheaper to import than manufacture in Kenya since there will be no input cost, hence the potential for closure of companies.
About 154 million litres of alcohol are sold in Kenya annually. Of that, 89.8 million litres are illicit, numbers that are likely to go up. That’ is the equivalent of 449,000 drums of alcohol.
Sales of illicit alcohol have been growing since Covid-19 and grew by 63 per cent between 2021 and 2022, industry trend show.
“The alarming growth of illicit alcohol sales poses a serious threat to public health, the economy, and the wellbeing of communities,” Abak chairman Eric Githua told the Star during an interview.
Spirits are the most counterfeited and smuggled category of alcohol.
The proposals in the Finance Bill will also see an increase on prices of beer above 6.33 per cent ABV (Guinness and Senator Dark), even as beer excise remains higher than other EAC states (three times that of Uganda and double that of Tanzania).
However, proposals to have excise rate on beer at Sh22.50 per centiliter (average ABV is 6.33%) is likely to see the industry experience recovery and a reduction in contraband, translating to a potential increase in revenue to the government.
According to EABL, beer was already at the top of the ‘Laffer Curve’ and revenues had flattened off.
Excise Duty from beer increased to Sh32 billion in 2023 from Sh27.4 billion in 2022, the Economic Survey 2023 indicates.
Meanwhile, the Finance Bill proposes that excise duty payment be done within Five days from 24 hours.
“The five days are a reprieve but the administration of this provision will still be unnecessarily expensive for manufacturers. Every fifth day means that excise duty will still be paid daily,” EABL noted, adding that the policy objective (combating illicit) for the change to 24 hours has not been achieved.
Instead, the provision has occasioned increased financing cost that make legitimate products more expensive.
The bill also proposes to restrict the period within which tax refunds can be lodged where in the case of income tax, within five years from the date on which the tax was overpaid; or in the case of any other tax, within six months from the date on which the tax was overpaid.
The period should be aligned to the tax records or tax assessment statute of limitation timelines, industry players propose.
The bill also seeks to empower the Kenya Revenue Authority Commissioner General to enforce a distinct process or system on taxpayers.
Failure to comply with this will attract a fine of Sh2 million for every month of non-compliance.
“This is an administrative constraint without any clear policy objective. Industries already have established integrated enterprise invoicing and payment systems and asking them to change occasions an increase in the cost of doing business without good reasons,” the players said.
ABAK has proposed that the proposed excise rates be staggered across the next four years to ensure the industry does not collapse.
“If you create a market shock of 79 per cent increase, it extremely distorts the market. Spirits will not be affordable,” Githua said.
It also wants excise tax submission reverted to the 20th of each month, which gives enough time for collections across the value chain.