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Tax plans signal a looming rise in beer, cigarette prices

beer

Patrons enjoy their beer. KRA is hoping to raise an additional Sh14 billion by raising tax on cigarettes and non-malt beer. Photo/AFP

Beer consumers and cigarette smokers are top in the list of those who will feel the pinch of higher pricing beginning July as the Treasury seeks additional money to meet the 17 per cent revenue growth target it has set for the next financial year.

The Treasury has indicated that it expects the taxman to collect Sh150 billion more next year – setting the stage for the introduction of new tax measures and a possible increase in existing ones to meet the target.

Aggressive expansion of the revenue target is the Treasury’s response to the big Budget it has crafted to finance increased government obligations, including the newly created counties, a large number of constitutional offices and the holding of a general election in March.

Revenue estimates that the Treasury has tabled in Parliament show that the Sh1.45 trillion Budget will be partly financed through a Sh14 billion increase in excise duty, pointing to a possible hit on easy targets such as beer and cigarettes.

A Sh14 billion growth in excise tax revenues translates to a 20 per cent growth from this year’s Sh71 billion – a margin that most tax experts are agreed cannot be realised through organic growth, leaving an increase in the tax rate as the most likely option.

The looming change in taxation of beer became even more apparent after Commissioner-General John Njiraini said KRA has recently noted a big shift in drinking habits in favour of non-malted beers that are sold in big jars making removal of excise duty on such beers a big avenue for revenue leakage.

“We are in talks with the Treasury and beer manufacturers on how to address this issue,” Mr Njirani said, signalling a possible introduction of excise tax on non-malted beer.

READ: EABL opens talks with taxman over proposed excise duty

According to him, domestic excise duty has been particularly affected by zero-rating of non-malted containerised beer brands such as Senator Keg which is produced by East African Breweries Limited.

The move has denied KRA billions of shillings in revenue after thousands of drinkers shifted to consuming containerised beer, helping grow volumes by more than 60 per cent in the nine months to March 31 this year. EABL declined to comment on this subject.

Keroche Breweries managing director Tabitha Karanja said higher excise tax collections from beer should come from organic market growth but that has not happened in the recent past.

“We have not seen any increase in beer volumes from the beginning of this year. The market has not grown. If the Treasury expects to raise more from excise duty on beer, then that will probably have to come from the new sellers in the market. If they raise taxes, then people will drink less and there will be less tax revenues,” she said.

The government is also expecting to collect billions of shillings through imposition of value added tax (VAT) on nearly all consumer goods after Parliament passes a new law ending tax exemptions.

The Treasury expects the new VAT law that ends most exemptions and zero rating on most goods to be in place by June, clearing the way for the taxman to collect billions in additional revenues.

The government is targeting an extra Sh42 billion with the coming into force of the new VAT law – a move that is also expected to push up the prices of staple foods such as wheat, maize, sugar and rice as well as agricultural inputs, pharmaceuticals and educational materials.

“We expect that the VAT Bill will be in place by June this year and that should help drive revenue growth from that segment,” said Economic Secretary Geoffrey Mwau. “The reforms being undertaken by the Kenya Revenue Authority should also contribute to raising the planned collections.”

Among the reforms that KRA has lined up to increase collections is the pursuit of landlords who have been denying the state billions of shillings in unpaid taxes for rental income.

Paying taxes

Mr Njiraini said that KRA had conducted a pilot survey of 100 houses in an upmarket estate in Nairobi and discovered that a “significant number of the landlords were not paying taxes despite receiving huge rental income every month.”

READ: Kenya taxman targets landlords in drive for new revenues

The Draft Financial Statement also shows that the Treasury expects the UN backed African Mission to Somalia (Amisom) to refund it Sh7.5 billion by June and another Sh15.7 billion by the end of June next year – totalling to Sh23.2 billion – to ease the burden of keeping Kenyan soldiers in Somalia.

READ: Budget factors in Sh23bn UN refund for Somalia war

The new VAT law is part of the deal that Kenya struck with the International Monetary Fund for a Sh63 billion ($760 million) three-year extended credit facility beginning early last year.

KRA said in a policy document that “the zero-rating was introduced in the VAT system to enable exporters, manufacturers and suppliers of zero-rated goods and services to claim refund of tax paid on inputs that go into zero-rated supplies.

“It was also meant to ensure that funds used by exporters, manufacturers and suppliers of zero-rated supplies are not unnecessarily tied down in taxation.”

Collectors of excise duty have spent much of the current financial year at a cross-road after Parliament refused to pass the Finance Bill, which gives the government a legal backing to impose new taxes.

Excise tax revenues also stayed behind target during the first half of the financial year as price wars stunted growth in key areas such as mobile phone airtime.

Cigarette manufacturer British American Tobacco said that it was in talks with the Treasury and the revenue authority for a repeal of the excise tax regime that began last year.

“We proposed some changes in favour of a single-tier tax regime and we believe that was a good initial step that should be deepened this year,” said BAT’s finance director Philip Lopokoiyit.

A more efficient excise duty collection was the target, he said, and noted that the change effected last June had increased revenue for the government but there was room for refinement.

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