Removal of duty on keg remission could hit gains in illicit brews war

President Uhuru Kenyatta recently assented to the Finance Act 2016 giving a legal grounding to the tax measures that Treasury secretary Henry Rotich proposed in his June Budget.

Top in the list of measures in the Finance Act is the repeal of the 90 per cent excise duty remission on beer made from at least 70 per cent content of sorghum, millet or cassava that is grown in Kenya and packaged in a pasteurised container of at least 30 litres.

This amendment means that effective June 9 the beer that meets the above threshold, keg or Senator as commonly known in Kenya, is subject to excise duty at the rate of Sh100 per litre as opposed to the previous Sh10 per litre.

Assuming that manufacturers maintain their current profit margins, the repeal of the 90 per cent excise duty remission will lead to sharp price increases.

To put the numbers into perspective, the recommended resale price of a 300ml mug to the final consumer, which currently retails between Sh25 and 30, will now go up to between Sh48 and 57 whereas a 500ml mug whose current recommended resale price is between Sh40 and 50 is likely to go up to between Sh76 and Sh95.

History of excise duty and beer remission

Excise duty is an indirect tax that is levied by the manufacturer, importer or provider of a service upon the sale of specific goods or offering of specific services within a country. It is a consumption tax whose impact is borne and felt by the final consumer.

Historically, excise duty was levied by governments to discourage people from consuming such goods as they were considered to be ‘harmful’ — hence the name sin tax. This is why excise duty traditionally targets alcoholic drinks and cigarettes.

Today, the government has increased the products and services subject to excise duty.

The narrative and objective of levying excise duty has mutated from influencing consumption behaviour of harmful goods to being an increasingly important source of government revenue.

Kenya Revenue Authority’s (KRA) revenue target for the year 2016/17 is set at Sh1.45 trillion.

This ever-rising target, together with the administrative reforms that the KRA has instituted mean that excise duty will continue to be an important source of government revenue.

The trend might have informed the government’s decision to scrap excise duty remission for keg beers.

Excise duty remission was first introduced by the government in 2006 where 100 per cent of excise duty applicable on keg beer was remitted.

The remission lasted for about seven years and effective October 1, 2013 the government slashed the remission by half and introduced stringent conditions for utilising the 50 per cent excise duty remission.

In June 2015, the government increased the excise duty remission to 90 per cent on beer made from at least 75 per cent locally sourced sorghum, millet or cassava.

Exactly one year later, the government has abolished excise duty remission on keg.

The scrapping of the 90 per cent remission on keg beer means that retail prices are expected to rise sharply as manufacturers pass on the new taxes to consumers.

Since the alcoholic industry is a very elastic and price-sensitive market, going forward one can expect a drastic fall of keg consumption as it will be out of reach for many. And just as nature abhors a vacuum, consumers of keg will likely shift to cheap illicit brew.

Kenya has fought a hard-won battle against illicit brews. Today, many youths are sober and going about the business of nation building, courtesy of the eradication of illicit brews.

In my view, the scrapping of this remission seriously threatens the gains Kenya made against the illicit brews fight.

The impact of the remission does not stop there. Keg supports tens of thousands of people in its value chain.

In 2013 when the government slashed the excise duty remission to 50 per cent, keg manufacturers terminated thousands of contracts with sorghum farmers besides the layoff of thousands of employees in the keg distribution chain.

The abolishment of the remission is expected to result in a loss of thousands of jobs that were supported by keg as its demand is likely to sharply shrink.

In the long run there is a likelihood of a health crisis emanating from the expected shift to cheap illicit brews by vast majority of Kenyans who will no longer afford keg.

Whilst the government is keen to bridge the current revenue collection shortfalls by scrapping such remissions, indirectly the government might be brewing a health menace that is far costly in the long run.

Since The Finance Bill, 2016 did not have this provision scrapping the remission on keg beer, policymakers must have thought this amendment through.

However, in my view, it is useful to review this policy because the short-term monetary gains are likely to be outweighed by the losses that Kenya is likely to suffer from a socio-economic perspective. Let’s see which way the wind blows.

Mr Mokaya is a tax associate with KPMG Kenya. Email: [email protected]. The views and opinions are those of the authors and do not necessarily represent the views and opinions of KPMG.