Companies

Treasury hits bottom end beer market with tax on Senator keg

keg

A keg joint at Kahawa West, Nairobi. For EABL, removal of tax incentives is likely to stifle Senator which it says is a significant component of its emerging business. PHOTO | FILE

Beer maker East African Breweries Limited (EABL) will no longer enjoy the tax remission on its popular Senator keg following the recent repeal of the law that granted the relief.

The repeal came through the Finance Act 2016, which President Uhuru Kenyatta signed into law last week, effectively removing key tax incentives that the Treasury had offered Senator to promote its consumption in the bottom end of the beer market that had been invaded by traders of lethal brews.

“The Alcoholics Drinks Control Act, 2010, is amended by repealing Section 68 A,” reads the Finance Act 2016, which comes with a retroactive commencement date of June 9, 2016.

The repealed law previously granted the remission of excise duty at the rate of 90 per cent on beer made from sorghum, millet or cassava grown in Kenya.

Tax experts said removal of the tax break, which stands at 90 per cent of standard excise tax on beer risked raising Senator’s price beyond the target consumers, forcing them back to consuming illicit brews.

The decision means that pricing of the beer, which was taxed at the rate of Sh10 per litre, will now rise by Sh90 to Sh100 a litre to match what is charged on other beer brands.

EABL is the only brewer that qualified for the tax incentive after it complied with the relevant conditions, including the requirement that the ingredients used to make the beer be at least 75 per cent content of the specified raw materials.

The law also required the beer to be packed in pasteurized containers of at least 30 litres – a rule that EABL complied with using metallic barrels, popularly known as keg.

Yesterday, EABL said it was yet to measure the full impact of the new law on its business. “We are still reviewing the potential effect of this change in law on our business and we will communicate further when we have a clearer picture of what it means for Kenya Breweries Limited,” the brewer said in response to queries on the matter.

Analysts, however, expect removal of the tax incentives on the beer to result in a steep price increase whose impact would be to offer market price advantage to illicit liquor it was meant to fight.

“Assuming that manufacturers maintain their current profit margins, the repeal of the 90 per cent excise duty remission will lead to sharp price increases,” said Caleb Mokaya, a tax associate at KPMG Kenya, adding that the recommended resale price of a 300ml mug to the final consumer, currently retailing at between Sh25 and Sh30, will rise to between Sh48 and Sh57.

“A 500ml mug, whose recommended resale price stands at between Sh40 and Sh50 will likely retail at between Sh76 to Sh95 under the new law,” Mr Mokaya said.

It is feared that at the high prices will enable traditional and illicit brews to reassert their sway in rural villages and urban slums where Senator had made inroads riding on the tax incentive and lower packaging costs in the form of kegs.

Repeal of the tax rebate is the latest policy flip-flop in terms of Senator’s taxation that has created uncertainty for the brewer, its customers and suppliers.

The beer brand was launched in November 2004 and was promoted as a safe and affordable alternative to illicit alcohol that has killed hundreds and left scores of others blind.

The government initially granted the beer an excise tax remission at the rate of 30 per cent and raised it to 42 per cent in 2005 after it was widely accepted among its target customers.

In 2006, the government effectively eliminated excise tax on Senator by raising the tax cut to 100 per cent in what saw the beer grab an estimated 40 per cent market share from illicit and traditional liquor.

In a move to raise more taxes, the tax remission was cut to 50 per cent in 2013 with negative outcomes for the taxman, EABL and consumers of the beer whose price rose by two-thirds to Sh50 for the 330ml serving.

Within weeks, thousands of Senator outlets had been closed and the sales of the product declined by over 80 per cent.

The performance also hurt the Treasury’s revenue target at the time, of raising Sh6.2 billion annually in excise taxes from Senator. Mr Kenyatta last year raised the excise tax remission to 90 per cent when he signed the Alcoholic Drinks Control (Amendment) Act 2015, offering reprieve to EABL, its customers, distributors and suppliers including thousands of local farmers. EABL said Senator sales tripled following the move.

The signing of the Finance Act 2016 has removed the tax incentive that EABL said is a key pillar of the product’s commercial viability.

READ: Coca-Cola, EABL fight new excise tax system

The company has said preferential tax treatment for Senator is critical since the traditional and illicit alcohol products it is competing against are not taxed.

The government has previously said reduction of tax cuts on the beer was meant to plug revenue leakages, arguing that a substantial number of people had downgraded from other beer brands that are taxed higher.

Continued subsidy of Senator was therefore seen as aiding the cannibalisation of other beer brands, potentially hurting revenue collection through an apparent tax arbitrage.

Exposing the beer to the full tax rates is seen as an indication that the argument has grown stronger among policymakers. It may also indicate the government’s belief that Senator has recently not been as effective in countering illicit alcohol.

For EABL, removal of tax incentives is likely to stifle Senator which it says is a significant component of its emerging business. Some 40,000 farmers who supply the EABL with sorghum for producing the beer will also take a hit in their earnings which grossed over Sh1 billion last year.

READ: Sorghum, millet farmers spared as MPs retain tax breaks