High cost of living cuts back billions off consumer taxes

Taxes collected from petroleum products, cigarettes, beer and mobile phone airtime declined in the first half of the fiscal year as rapid inflation, policy tweaks and price competition hit earnings from the key revenue items.

Fresh Kenya Revenue Authority data highlights predatory tariffs in the telecommunications sector as one of the causes in an across the board reduction in consumer taxes — mainly excise and value added tax — which analysts attributed to Kenyans struggling to buy essential commodities.

“It is a sign of the absence of economic activity because tax like VAT is based on consumption of goods and services,” said Rajesh Shah, a tax partner at PwC Kenya. The half-year tax collection by KRA indicated a substantial drop in volumes of petrol and excisable goods as Kenyans

struggled to make ends meet. Inflation in October stood at 18.91 per cent before peaking out at 19.72 per cent in November.

However, a deceleration to 18.93 in December raised hope that the nearly one-and-a-half year climb had ceased although the average inflation for the last three months of last year remained at a discouraging 19.19 per cent.

“Excise duty on domestic products was affected by a substantial drop in production quantities for excisable products,” said outgoing KRA Commissioner-General Michael Waweru.

The main excisable goods in Kenya are alcoholic beverages and cigarettes.

Consumer taxes in the first half of the year fell by a substantial Sh5 billion overall. In contrast, KRA managed to increase collection from trade and direct domestic taxes and fees and licences.

“Inflation meant that people could hardly afford essential goods and had to shift from expensive excisable goods like beer. Some could also have shifted to non-excisable alcoholic products,” said Francis Kamau a tax manager at consultancy Ernst & Young.

The inflation situation last year was exacerbated by tax changes effected by Finance minister Uhuru Kenyatta where a single band of tax was imposed on beer and cigarettes. That meant that the cost of popular beer brands went up by between Sh5 and Sh10, putting them beyond the reach of some consumers whose disposable incomes were already stretched.

However, some analysts believe that the impact of the tax on consumption was minimal compared to the impact of an earlier legislation — the Alcoholic Control Act 2010 popularly known as the Mututho law — which is having lingering effects on the economy and the alcohol industry.

According to Keroche Breweries managing director Tabitha Karanja, the requirement under the law that spirits be packaged in glass bottles could have substantially impacted on consumption.

“There was little change in beer volumes as a result of the taxes. But changing to glass bottles which is more expensive could have pushed some consumers to illicit products that are not taxed,” she said.

While the mainstream players East African Breweries Ltd’s UDV, Kenya Wines Agency, London Distillers and Keroche complied with the requirement, the option was not available to small distilleries that had to temporarily suspend production.

That meant consumers of cheap drinks switched to illicit or traditional brews which do not attract taxes or abstained from taking the beverages altogether.