OPINION

Keroche–KRA tussle: What it is and what it isn’t

These disruptive reclassifications explain the Sh14.4 billion case which we cannot discuss because the matter is currently in court.

In Summary

• This tussle between Keroche and KRA sheds light on how torturous our 22-year-old journey has been.

• Even though our faith in the cause of Kenyan entrepreneurship remains unshaken, it is time to voice the question that is being asked across Kenya – how does a local enterprise survive in such a hostile environment?

Keroche–KRA tussle
Keroche–KRA tussle
Image: OZONE

So what has made the Keroche vs KRA tax dispute become almost toxic and a subject that has severely divided public opinion in Kenya?

Two critical offices give approval when one introduces a new product. One, the Kenya Bureau of Standards approves the quality and determine product category and two, the Kenya Revenue Authority determines the tax rate.

This is supposed to be a simple predictable process.

In March 1997, KeBs approved Viena Fortified Wine. On June 4, 1997, KRA gave it a classification – Tariff HS Code 22.04 or 45 per cent of ex-factory value as the excise duty. This was reconfirmed on April 27, 1998.

Kenyans embraced the quality, cost-friendly Viena Fortified Wine. It brought more Kenyans to the drinking tax bracket. KRA tax collections surged. Everyone was happy. In fact, by June 2006, Keroche was due for a tax refund of Sh84 million.

However, in November 2006, KRA disrupted this arrangement. They wrote to Keroche saying they had made a mistake by classifying Viena under Tariff HS Code 22.04, and, a decision had been made to reclassify the product to a higher Tariff HS Code 22.06 or 60 per cent of ex-factory value as the excise duty.

KRA issued a notice to backdate the new 22.06 tariff for five years to recover their “error” amounting to Sh1.2 billion, with full knowledge Keroche had never collected this money from the public.

The matter went to court.

“The classification of the products had a direct bearing on the price Keroche was selling its products and applying a different classification years later is unfair, oppressive, irrational unreasonable and constitutes abuse of power and authority aimed at aiding Keroche’s competitors,” the High Court in Nairobi ruled on July 6, 2007.

Keroche’s victory was, however, short-lived.

Soon afterwards, the 200-08 Finance Bill forced the change of Viena classification to a higher tariff — 60 per cent of ex-factory value — that has killed the product.

KRA appealed the ruling. The court ruled that an appeal could be heard if and when KRA produced new supporting documents. KRA in defiance on May 10, 2017 sent the 2006 assessment that had been quashed by the High Court and demanded that Keroche pays the Sh1.2 billion within 14 days.

We objected and the matter was sent to the Tax Tribunal where it remained pending until last year, when the Tax Appeals Tribunal was constituted.

TAT recently ruled in favour of KRA in the much publicised Sh9.1 billion decision. Keroche stands with the 2006 decision that termed KRA’s change of tariff and backdating as “abuse of authority”.

Keroche Breweries in 2007 presented a new alternative for moderate drinking, a ready-to-drink vodka derived from our existing Crescent Vodka. This is similar to what a consumer would do – walk into a bar, buy some tots of Crescent Vodka and mix with water or soda. For illustration, 188ml of Crescent Vodka (40 per cent) is mixed with 312ml of naturally distilled high-quality water, which makes 500ml of Viena Ice ready-to-drink Vodka (15 per cent).

Little did we know that seven years later in May 2014, the same 2006 scheme would be replayed. Keroche received communication from KRA saying there was “confusion” of the applicable rate of the Viena Ice ready-to-drink Vodka.

The new demand directed that water added to our vodka to make Viena Ice ready to drink Vodka and consumed between 2007 -14 would now attract Sh119.90 per litre. The assessment was backdated for three years and new demands amounting to Sh6.113 billion issued.

This is the genesis of the highly publicised Sh 9.1 billion demand: Billions that do not exist in reality but on paper.

While we protested the new tax on the water as irrational and punitive, KRA on July 22, 2015 clearly acknowledged that Viena Ice ready-to-drink Vodka met the standards of innovation. Their letter was matched by KRA’s consistent support through issuance of stamps and collection of the tax as per the mutually agreed applicable rate.

However, in June 2019, KRA withdrew their support with a new letter demanding we either pay for the added water at the punitive new rate (now at Sh210/litre) or create a product below 10 per cent.

With the current product now priced beyond the target market, we opted to create another ready to drink vodka of less than 10 per cent. As per our initial fear, this change has left the product on its death bed.

These disruptive reclassifications also explain the Sh14.4 billion case which we cannot discuss because the matter is currently in court.

This tussle between Keroche and KRA sheds light on how torturous our 22-year-old journey has been. Even though our faith in the cause of Kenyan entrepreneurship remains unshaken, it is time to voice the question that is being asked across Kenya – how does a local enterprise survive in such a hostile environment?

The writer is the CEO, Keroche Breweries