• Revenue will decline, not increase. A tax rise amidst the pandemic will undo the benefits of Covid-19 interventions and rob honest citizens of basic services such as education, housing and healthcare.
• The President and his Cabinet should not effect the proposed tax increase.
Tax increases are rarely popular, more so today, when the country is still reeling from the impact of the Covid-19 pandemic.
A survey conducted in May by the Kenya Association of Manufacturers and KPMG revealed that manufacturers of essential goods have seen demand fall by 74 per cent, whilst 76 per cent were experiencing severe cashflow problems.
The numbers are much grimmer for MSMEs, with 86 per cent experiencing cash flow constraints, affecting their ability to meet tax obligations (64 per cent), pay employees (76 per cent) and pay other operational costs (79 per cent).
The decision to increase excise rates by the Kenya Revenue Authority on at least 31 products from October 1, including fuel, bottled water, juice, cigarettes and alcohol, not only exacerbates the current challenges but also goes against the efforts to cushion Mwananchi and businesses against the adverse effects of the pandemic.
A 5.43 per cent increase on these items means increased cost of production, which business will inevitably pass on to consumers through price hikes, to stay afloat. This tax increase will also erode the income of small and medium retailers who rely on the sale of excisable goods for survival.
With struggling consumers no longer able to afford these products, businesses will either shrink or at worst, close down. Additionally, illicit trade will thrive fuelled by consumer affordability challenges.
REVENUE DECLINING
As industry, we recognise the role of government revenue in providing social amenities to citizens, including education and health services. However, the additional tax increases, at this time, are likely to reduce government collections as production of the excisable goods decreases.
The government is already experiencing the effect of reduced production of excisable products due to the effects of the pandemic. This is demonstrated through KRA’s 2019-2020 full-year performance results, which revealed that domestic excise tax collections, declined by 6.4 per cent in FY 2019-20, a dip from an average growth of 4.3 per cent recorded between July 2019 and February 2020.
MORE ILLICIT PRODUCTS
Kenya has been grappling with illicit trade in the forms of smuggled, counterfeit and substandard goods, since long before Covid. It is discouraging to note that we have seen an upsurge in the vice as a result of the supply gaps created by some containment measures. Such is the case, that counterfeiters have taken advantage of the increased demand for Fast Moving Consumer Goods as well as closure and time restrictions on the operations of some sectors.
Taxes on excisable goods make up for 40-60 per cent of the retail price, giving huge financial incentive for traders in illicit goods to evade tax. Furthermore, the disparity in excise regimes in the East African Community has made Kenya a haven for illicit excisable products.
For instance, excise on alcohol is more than five times higher in Kenya than in Uganda and double for cigarettes, following a 20 per cent increase last October. This provides a platform for illicit products to be smuggled into Kenya, from neighbouring countries, where excise rates are massively lower.
VIABILITY OF BIG 4
The manufacturing sector has been attracting huge investments for new and existing players in the past few years, more so, the excisable goods segment. The proposed inflationary adjustment will deter investor’s ability to recoup their investments, and therefore decrease the confidence of local and foreign investors from investing in the country due to the unpredictable macroeconomic framework for businesses.
Instituting a moratorium against increasing excise tax rates for the financial year 2020-2021 will help the government realise its objectives for the manufacturing pillar of the Big Four agenda.
APPEAL TO PRESIDENT
Given this dire state of affairs, we appeal to the President and his Cabinet not to effect the proposed tax increase.
A tax rise amidst the pandemic will undo the benefits accrued from other Covid-19 interventions and rob honest citizens of basic services such as education, housing and healthcare. It will destroy the livelihoods of honest workers, including retailers who are dependent on the typically high trade margins for excisable goods and the thousands of Kenyan farmers who cannot cope with a drop in the demand for their tobacco leaf or barley crop.
It will also cripple businesses that are reliant on fuel. And perhaps most worrying of all, it will effectively promote consumer migration to cheaper illicit products
Our focus should be on building a resilient and sustainable industry to aid in charting forward its growth, development to attain the 15 contribution to Kenya’s Gross Domestic Product and create jobs as envisioned by the Big Four agenda.
CEO, Kenya Association of Manufacturers and the UN Global Compact Network Kenya Chapter Board chair. [email protected].