Uhuru seeks new weapon against inflation with change in tax law
Through amendments to be introduced in the Finance Bill 2011, Finance minister Uhuru Kenyatta (pictured) is seeking powers to vary excise duty beyond the current limit of not more than 30 per cent of the applicable (official) rate. PHOTO/ FILE
Treasury is seeking new powers to vary excise duty chargeable on goods according to the rate of inflation in yet another signal of the unease that the spiralling cost of living is causing policy makers.
Through amendments to be introduced in the Finance Bill 2011, Finance minister Uhuru Kenyatta is seeking powers to vary excise duty beyond the current limit of not more than 30 per cent of the applicable (official) rate.
“The minister may, by a notice in the Gazette, adjust the specific rate of excise duty to take account of inflation,” reads one of the new clauses that Mr Kenyatta will introduce in the Customs and Excise Act.
The tool would be particularly useful in the event of widespread social unrest caused by a steep rise in the price of consumer goods as has happened in recent months.
Section 119 of the Customs and Excise Act that Mr Kenyatta is seeking to amend allows him to increase or decrease excise duty by up to 30 per cent of the statutory rate without consulting Parliament.
The Act imposes excise duty on a range of goods, among them petroleum products, shampoos, deodorants, alcoholic drinks, cigarettes, wrapping materials, juices and bottled water.
Tax experts said the proposed changes imply that in future, the level of the government’s intervention may go beyond the current statutory limits if required.
“I presume the minister wants a legal backing for his past actions because he has all along been changing the specific excise rates to cater for inflation,” said Mr Nikhil Hira, a tax partner at Deloitte.
In April, Mr Kenyatta suspended the 30 per cent excise duty on kerosene and reduced that on diesel by 20 per cent to ease pump prices as high international crude oil prices hit key segments of the economy.
Sudden increases
Steve Okello, a partner at PricewaterhouseCoopers said giving the minister a free hand to vary excise duty with inflation will help cushion the consumer from sudden increases in costs such as transport.
Mr Okello said that apart from petroleum products, most goods that attract excise duty are luxuries whose pricing is irrelevant to low income earners currently bearing the brunt of high inflation
“Consumers would see huge impact on retail prices of essential commodities if the state had a free hand to tie rate of import duty on basic commodities to inflation,” Mr Okello told the Business Daily on Friday.
Under the East African Customs Management Act, Kenya has to consult her integration partners before adjusting customs (import and export) taxes.
The law, however, gives Treasury a free hand to lower import duty on maize, wheat, beans, milk or rice by any amount during periods of civil strife, national disaster or calamity.
But even as the government moves to influence national pricing, analysts are divided on the effectiveness of such regulatory measures.
“Whether or not the taxes are pegged to rate of inflation, prices are rising because of the inability by government to play its supervisory role, allowing traders to hoard basic commodities,” said Mr Otieno Odhiambo, an investments lecturer at the University of Nairobi.
In recent months, failure to supervise import licences has been blamed for the excessive increases in the price of flour and sugar, which are among the highest in the world .
“Kenyans pay about twice as much for sugar as Europeans, even though the drought did not affect sugar-producing areas.” says the World Bank’s latest report.
Kenyan consumers are paying up to $530 (Sh47, 700) per tonne of maize or more due to additional policy distortions that have disrupted the domestic food market.
This has translated to a higher price of Sh 112 per two kilogramme packet of maize flour. Kenyans paid a record $45 (Sh4, 000) per bag of maize in July 2011, which was more than double the price at the beginning of the year and about 70 per cent above the already high world market prices.
A breakdown of Kenya’s inflation by income groups shows that low income households have been hit hardest by inflation in 2011.
For instance, in October 2011, the inflation experienced by low income households was 19.6 per cent, compared to the previous year, in contrast to 14.5 per cent for high income households.
Mr Kenyatta is expected to introduce the amendments in the Finance Bill 2011 on Tuesday at the Committee Stage after having failed to do so on Thursday as Parliament adjourned early following emotive debate on Ethics and Anti-Corruption Commission nominees.
Apart from pegging excise duty to inflation, the changes are also seeking to end the current stand-off between the Kenya Revenue Authority and local manufacturers of wines and beers.
While the 2011/12 Budget Speech had changed the excise duty on beer from a specific rate to a hybrid of both the specific and ad valorem rate – in favour of the higher rate, this is captured in the Finance Bill 2011 as Sh70 per litre or Sh40 of the Retail Selling Price (RSP).
“The changes do not expressly define RSP and therefore still leaves room for different interpretations between manufacturers and KRA officials,” said Mr Hira.
Mr Kenyatta is proposing to amend the Customs and Excise Act to include RSP as the basis for computing excise on locally manufactured beer and wine.
Mr Hira, however, says the amendment still fails to define what RSP is, presenting a problem to the alcohol manufacturers since they do not have direct control of the price that the product is eventually sold at the marketplace.
