New taxes hit low income beer drinkers and smokers hardest
A man buys beer in a Nairobi supermarket. The increase in tax charged on alcohol and cigarettes will make it more likely for poor people to turn to illicit, and often dangerous, alcoholic drinks. File
The full impact of the tax measures that Finance minister Uhuru Kenyatta proposed in his Budget speech became clear yesterday with the discovery by low income earners that he had made it more expensive for them to drink and smoke even as he made food and energy more affordable.
Though Mr Kenyatta’s decision to impose a uniform ‘sin tax’ on all beer and cigarette brands will enable the taxman to collect his dues from cigarette and alcohol manufacturers more efficiently, its full impact was a general rise in prices that were most significant at the bottom end of the market.
Kenya’s largest beer maker, East African Breweries, said that although Mr Kenyatta had good ground to seek a harmonisation of the tax rate, he had set the threshold at a level that would culminate into a dramatic increase in retail prices.
“We would have preferred a lower rate of harmonisation as this amounts to a dramatic increase in prices of beer, including the non-malted brands such as Pilsner, Allsops and Citizen,” said EABL head of corporate relations Brenda Mbathi.
And Ms Tabitha Karanja, the managing director of the Naivasha-based beer maker, Keroche, said: “I thought the excise tax at Sh65 a litre was already too high and my fear is that it might push consumers to illicit drinks”.
The taxman hopes to collect an additional Sh10 billion in excise taxes after applying the new measures on all beers, cider and cigarettes.
The sin industry was yesterday still struggling to measure the likely impact of the measures on their revenues even as all signs pointed to a looming earnings drought as consumers of low-cost brands migrate to the cheap and often more dangerous drinks and cigarettes.
Mr Kenyatta imposed a fixed tax of Sh70 or 40 per cent a litre on beer, raising by margins of at least Sh5 (or Sh2.50 a bottle) from previous Sh65.
The tax measures were particularly hard non-malt beers, a growing segment of alcoholic drink market that mainly targets low-income Kenyans, and where prices jumped by higher margins of Sh15.
Wines tax rose by Sh10 a litre with the alternative tax that stood at 35 per cent rising to 40 per cent.
Beer and cigarette makers gave varied views but none appeared entirely comfortable with single-tier taxes in their respective industries.
Ms Karanja said she expected the price of lager to rise by up Sh5 per bottle. EABL said it expected the Sh5 tax adjustment to cover for the impact of inflation on its business, adding that the beer maker would adjust its ex-factory price to reflect the new measures.
Cigarette makers faced similar pricing challenges after Mr Kenyatta slapped the industry with a uniform tax of 1,200 per mille (a thousand cigarettes) or 35 per of the retail price.
The move is expected to push up prices of popular cigarette brands like Rosters, Rocket Supermatch and Sportsman.
What the blend of specific (based on measurement) and ad valorem taxes (calculated on price) for the sin industry means is that a reduction of ex-factory prices by manufacturers will not lessen their tax burden.
It means the taxman will always be the biggest beneficiary of upward adjustment of prices by manufacturers.
Although the minister did not spell out the revenue implications of the tax harmonisation, a senior Kenya Revenue Authority official confirmed almost all the budgeted increases in excise tax revenue would come from cigarettes, beer and wine.
Mr Francis Kamau, a senior tax manager with consultancy Ernst & Young, said: “Harmonising beer and cigarette taxes is a model that has been borrowed from Egypt and we are still trying to understand its possible impact on government revenues.”
Revenue estimates released on Wednesday indicated that total excise collection would rise from Sh83.8 billion collected last year to Sh93.3 billion helped by expected improvements in beer, wine, cigarette and cider markets.
The most interesting aspect of the tax measures is in the cigarette market where a uniform tax regime means disbandment of the traditional four tax bands. This is expected to culminate in a significant increase in the prices of bottom-end of market products even as the cost of premium brands falls.
The move is in line with the World Health Organisation (WHO) and the Ministry of Health’s recent drive to discourage smoking.
“The proposed regime will reduce incentives for substitution among different brands, in line with the public health objective of reducing tobacco consumption,” said Mr Kenyatta.
Previously, four bands factored in whether products were soft or hard cap, filter or non-filter and based on value.
Reducing revenues
Apart from smokers hopping from one brand to the next, WHO said manufacturers would shift to convenient bands through price manipulation, reducing government revenues.
“This means the minister has increased the price of non-filter and low-priced cigarettes and the poor fellow will go for kiraiku (traditional rolled tobacco),” said Mastermind Tobacco communications chief Josh Kirimania.
The move came in the backdrop of the December 2010 amendments to the Financial Act by the Parliamentary Finance Committee that resulted in what has been estimated at billions in tax loss.
Last December, the committee amended the Act to eliminate an earlier inclusion of cigarette length as a tax determinant which would have placed Mastermind’s Supermatch and BAT Sportsman at same tax level.
BAT in reaction reduced its price from Sh95 to Sh70, shifting the brand from its traditional class C to Supermatch’s less taxed B, causing a major revenue loss to both BAT and the taxman—estimated at billions in excise tax alone.
