Most businesses start out as small and medium enterprises (SMEs) and the cosmetics industry is no exception. What stands out is that the majority of cosmetic firms are women-owned.
This is because of low capital requirements, raw materials being locally available and the relative ease of manufacturing.
The best example is demonstrated by the growth of Suzie Beauty from an SME to a thriving make-up company that was sold to Flame Tree Group.
There is also Inter Beauty Products which started as an SME and later sold to L’Oréal Paris. We are also seeing many social media influencers who have ventured into building their own cosmetic brands.
This speaks to the great potential of the industry.
However, realising this potential dwindles as the government introduces new taxes and regulations that make it extremely difficult for more investments in the sector.
A case in point is the increasing tax obligations in the manufacturing of cosmetics, starting with the implementation of a 10 percent excise tax in 2017, which was further enhanced to 15 percent in July 2022.
This was followed by the changes from the ETR system to the TIMS system, which saw the sector incur compliance costs.
And earlier this year, the government proposed amendments to introduce Excisable Goods Management System (EGMS) stamps to cosmetics products at a rate of Sh2.5 per stamp effective 1st March 2023.
Hence, the introduction of the EGMS stamp will increase the tax burden to untenable levels and subsequently, make these basic products unaffordable to wananchi.
Besides the cost of the stamp, manufacturers, a majority of whom are SMEs, will be required to procure EGMS machines, which may not be compatible with the factory systems or be forced to hire people to place the stamps on the product and incur the logistics costs of getting the stamps.
Unfortunately, this cost ends up with the consumer.
At the onset, the government introduced EGMS stamps to combat counterfeiting and illicit trade. However, as demonstrated by the alcohol and beverage sectors, this has not been effective in addressing the surging counterfeits in the country.
Data from the Anti-Counterfeit Authority (ACA) shows that the total value of illicit trade was Sh826 billion in 2018, a 14 percent increase from Sh726 billion in 2017.
In terms of their GDP share, this represents an increase from 8.9 percent in 2017 to 9.3 percent in 2018. The ACA estimates that the numbers have hit more than Sh1 trillion this year.
On a national development level, excessive tax burden stifles innovation by diminishing the financial incentive people need to create new products.
Innovation reduces dependence on imports and builds trust for investors. Foreign investors would shy away as the net tax rate increases, and that makes investments unattractive.
Though we welcome the government’s intention to curb counterfeit and illicit trade, we do not believe that this is the solution as it has not worked for the alcohol and beverage sectors.
